Real estate depreciation is a vital tool for rental property owners. It will allow you to deduct the cost from your taxes of buying and improving a property over its useful life and thus lowers your taxable income in the process. Depreciation is the process used to abstract the costs of buying and improving a rental property. Taking one massive deduction within the year rather than shopping for property, Depreciation distributes the deduction across the useful lifetime of the property.

 

Depreciation reduces Tax Liability. If you have rented real estate, you essentially have to report your rental income and expenses for each rental property on the appropriate line of Schedule E when you file your annual tax return. The net loss or gain, then goes on your 1040 form. In Schedule E, Depreciation is one of the expenses you have to include. The depreciation amount effectively reduces your tax liability for the year and upcoming years also.

 

Hat assets are depreciable?

The depreciable property is any asset that is eligible for accounting and the tax process. The depreciable property items are long time assets. The IRS sets the guidelines for what types of assets you can depreciate; the following criteria should be met:

  • You own the property.
  • It’s a part of your business, or you use it to produce income.
  • You can determine its useful lifetime, meaning it’s something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
  • The property is anticipated to last for more than one year.

Some examples are as follows:

  • Real estate
  • Equipment
  • Vehicles
  • Computers
  • Office furniture

Is Depreciation a fixed cost?

It can be a fixed cost by using most of the depreciation methods, regardless of whether the business activity level changes since the amount is set each year. The exception is the units of production method. In this method, the more units your business produces, the higher your depreciation expense will be. Thus, when using the units of production method, depreciation expense is a variable cost.

How to Calculate Depreciation?

  • Determine the Basis of the property

The basis of the property is the amount you pay to the property owner to acquire the property. There may be some settlement fees and closing costs that may include the Basis such as recording fees, surveys, transfer taxes, title insurance and other legal fee amounts that the owner owes you to pay. Click here for property depreciation calculator to calculate your property basis in an easy way!

  • Separate the value of land and buildings

As you’ll solely depreciate the value of the building and not the land, you need to verify the worth of everything to depreciate the right quantity, to work out the worth, you’ll base quantity on the assessed land tax values.

  • Determine the adjusted basis

Sometimes, you may have to make changes for specific events that happen between the time you purchase the property and also the time you have got it prepared for rental.

It can be assumed that you know the property and worth of the house. Now you can determine your basis in the house and calculate depreciation.