How to Depreciate Rentals
When you own rental property, one of the biggest deductions that you get to take on your tax return is that of depreciation. The Internal Revenue Service allows you to take a deduction based on the loss of useful life in your rental property. While this provides you with a potentially large deduction every year, claiming the deduction can be an issue. You must calculate how big the deduction is and then report it on the appropriate form.
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Instructions
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Determine the cost basis that you have in the property. Typically, the cost basis is the amount of money that you paid for the property plus any other expenses associated with buying. If you are converting your primary residence into a rental, the cost basis is the lower of the purchase price or the fair market value at the time.
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Allocate the appropriate value to each type of property that you are renting. For example, you will typically allocate some value to the land, some value to the house itself and some value to the contents in the rental, such as the appliances. This is important because each piece of property depreciates at a different rate.
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Figure out the amount of depreciation for each asset for the year. Land cannot be depreciated when taking a deduction on your tax return. With residential real estate, you typically depreciate it over the course of 27.5 years. This means that you take the cost basis and divide it by 27.5 to determine how much of a deduction to take. Personal property such as appliances is depreciated over a schedule of five years.
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Download Form 4562 from the Internal Revenue Service website. This is the form that you report all depreciation on. Fill out the form with the property that you are depreciating and include the appropriate figures. The information from this form will later be added to the primary tax return.
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Tips & Warnings
Take extra time to make sure that you allocate the value of your property correctly. If you allocate too much value to the house and not enough to the land, it could be a red flag for the IRS.
