Did you know that last year the average cost of buying a property in Utah was $450,000? That price doesn't include closing fees or the cost of year-round maintenance. While property ownership might seem a tad expensive, there are ways to reduce its costs.
If you're a landlord or real estate investor you should know about rental property depreciation. In this article, we'll go over what property depreciation is and why it's a beneficial tool for real estate owners.
What Is Rental Property Depreciation?
Real estate investors, like any other business owner, want to maximize their ROI while paying the lowest amount of taxes possible. Tax write-offs are the main way business owners reduce the taxes owed each year. One tax write-off tool investors use is rental property depreciation.
Rental property depreciation allows a property owner to write off the costs of owning and maintaining a property.
How Property Depreciation Works
According to the IRS, there are specific rules for how property depreciation can be written off. The following criteria must be met:
- You are the owner of the property
- The property must generate some kind of income
- The property must have a useful life (decays and loses value over time)
- The property must be expected to have a useful life longer than 1 year
Depreciation starts as soon as a property is ready to generate income. From the day your property is available to rent you can start the depreciation clock. Rental depreciation continues even if the property is not currently in use due to maintenance, repairs, or screening of a new tenant.
How Is Rental Property Depreciation Calculated?
Depreciation is calculated using the cost of a property, the property's useful life period, and a depreciation method. Let's take a look at how they all come together.
Property Cost Basis
The cost basis of a property is the total amount paid for the property. This includes the list price of the property plus all closing fees, such as contract reviews, inspections, and more. For example, if the list price of the property is $300,000, and the total cost of closing fees is $5,000, then the total cost basis is $305,000.
Depreciation Method & Useful Life Period
There are two different depreciation methods that get used for property depreciation. They are the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). In general, the ADS is not used unless otherwise required.
With the GDS, the useful life period of a property is 27.5 years. This means that every year 3.6% of a property's basis cost can be deducted.
Using our example from earlier, the rental property depreciation of our $305,000 property is $11,090 a year.
Double Check Your Numbers
Property depreciation calculations involve a proper understanding of tax codes. For this reason, your final calculation should be evaluated by a certified tax accountant or property manager who offers rental property accounting services.
Reap the Benefits of Property Depreciation Today
No one likes to pay more in taxes than they have to. If you're a landlord or real estate investor, use this guide to get started on taking advantage of rental property depreciation. It is an invaluable tax write-off tool that will make growing your business much easier.
Are you a property owner or real estate investor looking for property management services? We're here to help. Contact us today to get started!
