How to Calculate Depreciation Expense for a Leased Asset
If you own assets that you lease to individuals or businesses, you may take a deduction for depreciation expenses to offset the rental income you receive from the asset. Property you lease is depreciated from the day you first place the asset into service or otherwise make it available for lease, until the date you retire the asset from service. An asset is retired from service when you no longer wish to make it available for rent; you sell it or dispose of the asset in another manner, such as liquidation, donation or converting it from an item you rent for income to an asset you use personally.
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Instructions
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Determine your cost basis in the asset. Your cost basis is the amount you paid for the asset, plus sales tax, delivery charges and testing fees, if applicable. If you convert the asset from a personal asset to a rental asset, use the fair market value of the asset on the date of conversion as your cost basis.
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Add amounts you pay to ready the asset for service to your cost basis. Include costs to perfect a title, install utility lines or make repairs to the asset. The result is your basis for depreciation. If you have depreciated the asset in prior tax years, you must subtract the amount of depreciation you have expensed for the asset over the course of its service life to determine your basis for depreciation.
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Determine the classification for your property. Assets are depreciated over a specific period of time depending on how the property is classified. For example, if you lease a residential home, the recovery period is 27.5 years. If you lease vehicles, computers, copiers or appliances, the recovery period is five years. If you lease office furniture or equipment, the recovery period is seven years.
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Determine your depreciation method and convention. The depreciation method and convention determines the percentage of your basis that you are allowed to depreciate each year. Residential real estate is depreciated under the straight-line depreciation method using the mid-month convention. Assets you lease under the five- or seven-year recovery periods are depreciated under the 200 percent double-declining depreciation method using the half-year convention.
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Obtain the instructions for IRS Form 4562 on the irs.gov website. You must claim your depreciation expense on Form 4562. The instructions for the form provide the depreciation calculation percentages you must use to determine your expense for depreciation.
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Locate the depreciation tables in the back of the Form 4562 instructions. Use Table A for five or seven year property and Table C for 27.5 year property.
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Find the row on the left side of the table that matches the year of service your asset is in when you calculate the depreciation. If you use Table A, scroll over to the column that matches the classification life of your asset and multiply your basis for depreciation by the percentage listed. If you use Table C, scroll over to the column that matches the month your asset was first placed in service. Multiply your basis for depreciation by the percentage shown in the table. The result is your depreciation expense for the leased asset.
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