Included in the financial benefits of investing in rental properties during tax time are when investors get to deduct not only operating expenses, property taxes, and so on, but also depreciation. This key tax deduction works differently from the others by reason of the method it is calculated and applied. Though failing to take a deduction for depreciation can induce quite a few annoying issues at a later time. Hence, it’s vital for Highland rental property owners to truly know and understand what depreciation is and the reason why you should be deducting it in your taxes every year.
In relation to buying and improving rental properties, depreciation is the process used to deduct any associated costs. Rather than take one large deduction the year the property was purchased or improved, the IRS has set out that rental property owners should allocate those kinds of deductions over the useful life of the property. Then, in actuality, rental property owners would be deducting a portion of their purchase and improvement costs (not operating or maintenance costs) each year for several years. This can pretty much taper off the amount of taxable rental income you note on your tax return, actually making depreciation worth the time it takes to calculate.
A property owner is permitted to begin taking depreciation deductions as soon as the rental property is placed in service, or otherwise stated, good to go as a rental. This is excellent news for property owners who are experiencing a vacancy right after acquiring it or during renovations. How much time you need to apply that depreciation are dependent on both how long you own and use the property as a rental, and which depreciation method you use.
There are different depreciation methods that determine the amount you can deduct each year. Additionally, the most common one for residential rental properties is the Modified Accelerated Cost Recovery System (MACRS). Usually, MACRS is administered for every residential rental property placed in service after 1986. In this process, the expenses of obtaining and expanding or improving a rental property are spread out over 27.5 years, notably what the IRS considers to be the “useful life” of a rental house.
To know just how much your depreciation should have to be each year, you’re required to ascertain your basis in the property or the amount you paid for it. You’ll also have to include some of your settlement fees, legal fees, title insurance, and other costs paid at the settlement. The burdensome part of this number is that you’ll have to separate the cost of the land from the building since only the rental house itself – and not the land it is built on – can be depreciated. In most cases, you should use property tax values to make it possible for you to distinguish at what amount of the purchase price ought to be charged to the house or your accountant might elect to use a standard percentage.
Immediately after you have calculated the exact value for the rental house, you’ll have to go one step further and figure out your adjusted basis. A basis in rental property can be modified to account for things like major improvements or additions, money spent restoring extensive damage, or the cost of connecting the property to local utility service providers. The basis could as well decrease in the event of insurance payments you received to cover theft or damage and any casualty losses you took a deduction for already that were not covered by your insurance. Employing your adjusted basis, you could actually now calculate the amount of depreciation you can deduct on your income tax return.
Depreciation of a rental property is a valuable tool for investors looking to reduce their annual tax obligation. Notwithstanding, rental property tax laws can be complex and change quite a bit eventually. In this regard, it’s best to work with a qualified tax accountant to ensure that depreciation is surely being calculated and applied correctly.
When you appoint Real Property Management Utah County, we will definitely tie you up with accounting professionals who can help you with your depreciation questions and more. Appointing our experts can help property owners make sure that there are no unpleasant surprises all during tax time. For added advice and information in reference to our Highland property management services, contact us online or give us a call now at 801-224-0033.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.