Depreciation Schedule For Rental Property

Because a rental property is a business asset for most people, it means that there is the chance to add depreciation to the asset every year when tax season hits. This allows you to be able to protect your income from losses that you experience during the year. Over time, items just wear out. Knowing the depreciation schedule of a rental property is useful because it will allow you to write off a specific fraction of the cost of an item that has been installed, upgraded, or repaired.

Keep in mind that depreciation schedules may be updated annually. Use this as a guide only and not for practical tax purposes.

How Do You Depreciate Property

The easiest and most common method of depreciating property is through the straight line method. This means you will need to own the property over a specific amount of time and know the life span of the item. A carpet will typically depreciate in 7 years after it has been installed. For tax purposes that would mean you could depreciate 1/7th of the cost to install the carpet. You would then be able to take this depreciation over 7 years until the value of the carpet reached $0.

What trips up rental property owners is when a repair is made to the home. Many repairs are usually just deducted as any other business expenses would be, but the exception would be if the repair improves the value of the rental property. If you had to put caulk into your siding seams because it was leaking, that would be a business expense deduction. If, however, you replaced all of the siding on the house, you would affect the value of it and the cost of the repair would need to be depreciated.

How Fast Do Items Depreciate?

Some items depreciate faster than others. The exterior and overall value of a rental property generally depreciates over a period of 27.5 years. It is important to note that you're not depreciating the assessed value costs over time, but what your actual investment was. If you purchased a rental property as a business asset for $100k and three years later it is assessed at $300k without improvements, you still only claim the 1/27th of $100k annually.

When you add to the value of the rental property by making repairs or upgrades, you'll start depreciating items differently. Paint, for example, typically has a depreciation life of just 3 years in many instances. A new roof might be 10 years or 25 years instead of the 27.5 years depending on the materials that were used to protect against the weather.

What About Improvements a Tenant Makes?

Although you might claim ownership of an improvement that a tenant makes to a rental property, you have no financial claim to depreciate that improvement. That's because you invested no money to get the improvement completed! It is the tenant who makes the improvements who can depreciate a permanent improvement and they must follow the same depreciation schedule as a property owner.

When you know what you can deduct and what must be depreciated, then it becomes much easier to get your taxes completed every year. Take the time to find the practical life of your upgrades and items and then apply the depreciation schedule as indicated above to maximize your rental income.
Posted on Sep 29, 2014


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