Depreciations In Rental Property

If you’re already an investment property owner or are thinking about becoming a landlord, here’s a refresher on how the depreciation expense could help you maximize your tax savings. When you own property, each year you write off costs for money you expend where the cost is a one-year expense, such as gardening, general maintenance, repairs and others. Some of the cost is for an improvement such as a new kitchen, a new window or new sidewalks. Because those costs have a useful life beyond one year, you must “capitalize” and depreciate those costs.

Depreciable Property

To take a deduction for depreciation on a rental property, the property must meet specific criteria:

• You must own the property, not be renting or borrowing it from someone else
• You must use the property to produce income in this case, by renting it
• You must be able to determine a "useful life" for the property. This means that the property must be one that would eventually wear out or get "used up." A house has a definable useful life; a piece of land does not.
• The property's useful life is longer than one year. If the property would get used up or worn out in a year, you would typically deduct the entire cost as a regular rental expense.

One common misconception is thinking of depreciation as a way of accounting for repairs for normal wear and tear the leaking dishwasher, the ratty carpeting, the sagging deck. But rental property depreciation doesn't cover repairs, only what you buy or improve that's it. Brisbane rental property depreciation gets depreciated over 27.5 years. What you do is to take the cost of the building, but not the land, divide it, and claim that amount on Form 4562 as well as carry it over to your Schedule E as an expense. You can do the same thing with any major improvements. Since this depreciation comes directly off of your rental income, it reduces the income that you have that is subjected.

Long It Lasts

You start taking rental property depreciation deductions not when you buy it but when you begin using the property to generate rental income. This refers to this as putting the property "in service." Depreciation continues until one of two things happens:

• You have deducted your entire "cost basis" in the property. In most cases, your cost basis is what it cost you to acquire the property, including certain taxes and fees paid at settlement, plus any improvements to the property.
• You remove the property from service. Meaning, you stop using it to generate income. This may be because you sold the property or just decided to stop renting it.

The biggest capital asset of any property is the actual purchase of the house. When you buy a rental property and will own it for longer than one year, you can depreciate the structure. You must divide the purchase price of the property between the land and the building. You can use your tax assessor’s estimate of the cost of each of those components, an appraisal or an insurance agent’s estimate of the cost of the building. Either way, you can only depreciate the building, as theoretically the land portion of your purchase price is not “used” up and cannot be used in Brisbane rental property depreciation.