Are you a real estate investor? Are you renting out some of your property to tenants? If you answered “yes” to either of these questions, you may be able to claim rental property depreciation on your taxes. But what exactly is rental property depreciation, and how can you claim it on your taxes? Fear not, for this blog post will provide you with a step-by-step guide on how to do just that.

What is Rental Property Depreciation? 🤔🏗️📈

Rental property depreciation is when you deduct the cost of the property over time due to wear and tear, deterioration, and obsolescence. Basically, properties lose value over time and the IRS allows you to write off that decrease in value as a tax deduction. When you own a rental property, you can claim depreciation on the property every year for up to 27.5 years.

Step 1: Determine Your Property’s Useful Life 🗓️📜🤓

The first step in claiming rental property depreciation is determining the useful life of your property. This is important because it determines how long you will be able to claim the depreciation deduction. Most commonly, residential rental properties have a useful life of 27.5 years. You can find the useful life of your rental property in IRS Publication 946, How to Depreciate Property.

A calendar with crossed out days

Step 2: Determine Your Property’s Basis 🧾💰🏠

The next step is to determine the basis of your rental property. This is the amount of money you paid for the property, including any associated fees, such as closing costs and title fees. You’ll need to determine the basis of land and buildings separately, as the two are depreciated at different rates.

An image of a property deed and a calculator

Step 3: Determine Your Property’s Depreciable Basis 🧮📉💳

Now that you’ve determined your property’s basis, you’ll need to determine its depreciable basis. This is the amount of money you can depreciate over the useful life of the property. To determine your property’s depreciable basis, subtract the value of the land from the total basis of the property.

A diagram of a house with the land value subtracted from the total property value

Step 4: Choose a Depreciation Method 📊🤔📈

There are two methods for calculating rental property depreciation: straight-line and accelerated. Straight-line depreciation spreads out the depreciation deduction over the useful life of the property, while accelerated depreciation allows you to deduct more in the early years of the useful life and less in the later years. Consult with a CPA or tax professional to determine which method is best for you.

An image of a calculator with two buttons for straight-line and accelerated depreciation methods

Step 5: File Your Tax Return with Form 4562 📄📝📨

You will need to use IRS Form 4562 to claim your rental property depreciation deduction. This form must be filed with your annual tax return.

A screenshot of IRS Form 4562 with rental property depreciation deductions highlighted

Tips and Things to Remember ✍️💭🧠

  • Keep accurate records of all rental income and expenses.
  • Remember to deduct any expenses related to the rental property, such as repairs, maintenance, and mortgage interest.
  • You can only claim rental property depreciation on the portion of the property that is used for rentals - not on any personal use portions.
  • Your tax professional can help you navigate the complex world of rental property depreciation and ensure you are claiming all eligible deductions.

And there you have it, a step-by-step guide on how to claim rental property depreciation on your taxes. Remember to keep accurate records and consult with a professional to ensure you are maximizing your tax deductions. Happy investing! 💰💵🎉

A smiling person holding a stack of money