Depreciation 

Some assets lose value over some time. For instance, a car loses value once it’s been used to drive up until it stops working. This is because the value of an item varies depending on how it is used. Put it this way, a car will have more value when it was well maintained before it is sold compared to a car that has been poorly kept and rarely used. 

Depreciation is a method that allows you to deduct or lessen a percentile of the value you lost on your taxes annually. It can be used and applied by anyone who is investing in rental properties. Whether the property comes from a mortgage or is poorly kept, the condition of the property isn’t important for you to calculate and get depreciation for reducing your tax in your rental properties.

The IRS allows homeowners to depreciate their rental property over its life expectancy which according to them is 25.7 years. In order to understand more about this, it is essential to know the basics of depreciation. Below is a simple guide about depreciation.

 

Basics of Depreciation

When it comes to getting Depreciation, your land property is not included as it only applies to buildings such as houses, condos, and townhomes. Essentially, you first need to separate the value of the two before you can begin calculating it and use it in your tax assessment. 

BTW, if you are interested in topics like this, check out this article.

The cost of important improvements in your property can also be depreciated such as placing a new sink or renovating your bathroom. However, routine maintenance is under the exemption, therefore, is not included. For example, air conditioning when installed in your home can be depreciated but maintaining it is not included.

Depreciation starts when your property enters the rental market not when it is just purchased. Usually, it is when the day it becomes available for rent. However, the IRS has various requirements that you need to fulfill in order to make it eligible to depreciate your property. These includes:

• The property must be used to produce income.
• You must be the owner of the property.
• It must have a determinable useful duration of more than a year.

Though these requirements may be easy, there is also one that’s a bit hard to complete. The IRS has a limit of the amount of time you can spend on your rental property when it is not in use or idle. This is because when this happens, it is considered to be a residence that is used for personal use hence can’t be depreciated such as

• Staying more than 14 days annually
• Staying above 10% of the total days when you rent it to others

Your dwelling place may be more than one during the year. For instance, your home is a dwelling unit that is used as a residence when you stayed there for 11 months. Also, your vacation home may also be a dwelling unit used as a residence when you stayed for 30 days during a year not unless you rent it out to others at a fair value for at least 300 days or more. 

 

Why It is Essential

Some tax expenses in your rental property can be reduced. For instance, you can use actual expenses such as property taxes and the cost of routine maintenance as tax reductions. These are used only to offset rental income and are deducted in the same year. So, if the cost you bring is more than one then you can get zero taxable income on the rental property but get no added benefits.

However, Depreciation lessens your total tax liability. This is because it is a tax reduction that can lower your income. By off-setting your profit in your rental property, It is somehow also possible that depreciation can lower your tax bracket. Though it requires a lot of planning, this can result in big savings. 

However, there’s a small crease in depreciation. When you sell a property that you own for a value that’s more than its depreciated amount, you will owe a tax for that gain. This is called “depreciation recapture.” The great thing about this is that its maximum tax rate is 25%. So when you