Rental property depreciation is a tax deduction that lets eligible landlords recover the cost of a rental building over time, but figuring it out correctly requires separating the value of the land, identifying the depreciable basis, and applying the proper recovery period and convention. Think about it: this guide explains how to calculate depreciation on rental property under current U. S. federal tax rules, with practical examples and common pitfalls to avoid.
Introduction to Rental Property Depreciation
Rental property depreciation is not a claim that your building is physically losing value at the same rate as the deduction. It is a tax concept known as cost recovery. Because a building generally wears out or becomes less useful over many years, tax law allows its cost to be deducted across a specified period rather than all at once Took long enough..
Three important principles apply:
- Land cannot be depreciated. It is generally considered to have an indefinite useful life.
- Only the building and qualifying improvements can be depreciated.
- The property must be placed in service, meaning it is ready and available for rent, before depreciation begins.
The calculation can affect taxable rental income, reported losses, and taxes owed when the property is sold. Because individual circumstances vary, complex situations should be reviewed with a qualified tax professional.
What Can and Cannot Be Depreciated?
A rental property purchase normally includes both land and a building, even though the purchase agreement may show
