If you’re new at owning a rental property, you may be finding that all of the rules and regulations, laws and so forth are a bit overwhelming. Add on top of that tax requirements, what you can and can’t write off, how and so on, a new landlord can find themselves spending a lot of time on all those ins and outs.
One of them is depreciation and what you can depreciate.
What is depreciation?
Depreciation sounds daunting, but basically it’s writing off the cost of an item that will be useful to the property for more than one year. How much and how long depends on several things, but basically if the cost is a one year expense, you write it off in its entirety that year, but if it’s a larger improvement that will last, such as a bathroom overhaul or new driveway, then you depreciate the costs over the useful life of the item or items.
That means you divide the total cost by the useful life of the improvement, and write off 1/nth of the cost per year.
You can only do this with property that wears out, decays, gets used up, or becomes obsolete over time. For instance, the land the building is on isn’t an item you can depreciate, but he building is. According to the IRS, you can depreciate a rental property if it meets all of these requirements:
1) you own the property;
2) you use the property in your business or as income-producing activity;
3) the property has a determinable useful life (i.e. it will wear out, etc.); and
4) the property is expected to last more than one year.
So what can be depreciated?
The structures on the land, house, garage, sheds, swimming pools, parking lots, tennis courts, and other facilities for your tenants. These can all add up to a substantial deduction from the income of the property for tax purposes.
Other items are things inside the home: stoves, refrigerators, furniture, carpets/flooring and furniture (if you provide a furnished space). Other things that you use in connection with the rental property, like computers, lawn mower, or automobile you use to conduct your rental activity.
If you aren’t sure, contact a tax professional for guidance.