Rental Depreciation Method

The IRS allows property owners to take a deduction for any property that they are actively renting. The IRS sets guidelines for the depreciation methods property owners must use to calculate the depreciation amount. Which method to use depends on when you first started to rent the property. Besides depreciation deductions for the property, improvements to the rental property are also depreciable.

Depreciable Rental Property

Before claiming a deduction for property depreciation, you must first determine if the property is eligible under IRS guidelines. To claim the deduction, you must own the property -- you cannot depreciate property that you are currently renting from someone else. For example, if you are subletting an apartment to someone else, you cannot depreciate the apartment if you don't own it. If you have a mortgage on the property, the IRS considers you to be the owner. Secondly, the property must have a useful life expectancy of more than one year. The property must currently be used for income generation. Land is not depreciable, but improvements to the land such as roads, fences or buildings are eligible for depreciation.

Which Depreciation Method Should You Use?

There are three depreciation methods allowable for rental property. For properties beginning service before 1981, the straight line or declining balance method is used. Property rentals starting after 1980 but before 1987 should use the Accelerated Cost Recovery System or ACRS. All other property rentals starting service after 1986 use the Modified Accelerated Cost Recovery System (MACRS) for depreciation calculation. It is important to remember that the basis of which method to use depends on when the property is first used to generate income, not the purchase date. This means that if you purchased your home 30 years ago but started renting it out in 2010, you would use the MACRS system to calculate the depreciation. The IRS website contains a listing of property classes for MACRS-depreciable property based on the useful life of the property.

MACRS Depreciation Systems

If your rental property depreciation falls under the MACRS method, there are two systems available for depreciation calculation. The first is the General Depreciation System, or GDS. Most depreciation falls under this system, which utilizes the 200 percent declining balance method for property falling into the IRS defined property classes. Residential rental property uses the MACRS straight line depreciation under this system. The other available system for depreciation calculation is the Alternative Depreciation System or ADS. Most tax filers use GDS unless the law requires them to use ADS. The ADS system is simply a straight line method of depreciation. Those electing to use this method will have a longer recovery period. This system is best in instances where a high deduction is not needed or if the filer wishes to avoid the alternative minimum tax.

Calculating the Cost Basis

The most important component in calculating depreciation is the cost of the rental property. The cost becomes the basis of the annual depreciation. Normally, the purchase price of the property is the cost; however, if the item was originally for personal use, then the cost may need to be adjusted. Some examples of adjustments include legal fees, restoration costs and property improvements. You can continue depreciating the property until you recover the cost of the property, at which time you can no longer take a deduction for depreciation.

---

• 
  

  Depreciation Methods

  taxguide.completetax.com/text/Q14_2960.asp

  Depreciation Methods. The depreciation method that you use for any particular asset is fixed at the time you first place that asset into service.

• 
  

  Publication 527: Residential Rental Property; Depreciation

  www.unclefed.com IRS Tax Forms 2001 Publications

  527: Residential Rental Property; Depreciation ... You recover your cost in income producing property through yearly tax deductions.

• 
  

  How to figure depreciation on rental property? - Yahoo! Answers

  answers.yahoo.com/question/index?qid=20080814203428AAiQcWCLast updated: Aug 15, 2008 6 posts First post: Aug 15, 2008

  Aug 15, 2008 OK can someone explain it to me like I'm 10. I have a condo that I rent out, and I'm supposed to figure depreciation on it? For my taxes. I looked it up ...

• 
  

  Understanding Rental Property Depreciation and Recapture Tax

  ezinearticles.com Real Estate Investing

  Apr 07, 2009 One of the true benefits of owning rental income property is that real estate investors can depreciate the property and enjoy the positive cash flow ...

• 
  

  What is the depreciation schedule for carpeting in a rental unit ...

  answers.yahoo.com/question/index?qid=20070601190937AAaJWp5

  Jun 02, 2007 I live in San Francisco, California and a new carpet was placed in a rental unit. The carpet will need to be replaced when the tenant leaves due to damage.

• 
  

  Accounting: Depreciation-Straight Line Method - YouTube

  www.youtube.com/watch?v=UGcHAa8GbM8

  Sign in with your Google Account (YouTube, Google+, Gmail, Orkut, Picasa, or Chrome) to add profblazarus 's video to your playlist.

• 
  

  2. Depreciation of Rental Property - Internal Revenue Service

  www.irs.gov/publications/p527/ch02.html

  You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost ...

• 
  

  Rental Property Depreciation Examples - EasyRentalTools

  www.easyrentaltools.com/...title=rental-property-depreciation-example

  Rental Property Depreciation Examples. The first year of depreciation on a rental property will differ depending on the month first made available as a rental.

• 
  

  Rental Property Depreciation - Determining how to depreciate a ...

  www.real-estate-owner.com/rental-property-depreciation.html

  Rental Property can be an effective tax shelter due to Depreciation Be sure to Depreciate your Rental Property because the IRS

• How to use the EasyRentalTools rental property depreciation

  www.easyrentaltools.com/...title=rental-property-depreciation...howto

  The EasyRentalTools rental property depreciation calculator allows us to simply enter a purchase price and date and then follow the screens to a chart of our annual ...

Related Posts

You're reading an article about Rental Depreciation Method and you can find articles Rental Depreciation Method this is url https://rentingahomes.blogspot.com/2013/10/rental-depreciation-method.html,you may spread or copy and paste it if the article Rental Depreciation Method This is very beneficial to your friends, but do not forget to put the link Rental Depreciation Method as the source.