How to Calculate the Depreciation on a Rental Condominium

Depreciation is a write-off, for tax purposes, of the cost of your investment. The three factors that affect rental property depreciation the most are the purchase price of the property, the useful life of the property and the depreciation methodology used. This example will focus on the depreciation methodology recommended for rental properties by IRS Publication 572.

Instructions

1. Determine the recovery period. According to the IRS, residential rental real estate is considered 27.5-year property; that is, the cost of the property is depreciated over a 27.5-year period. This means that the cost of the property is depreciated over 27.5 years, which, expressed as a percentage, equals 3.636 percent of the cost a year.

2. Determine eligibility. Only the cost of the structure on the land is allowed to be included in the depreciation calculation. The value of the land cannot be depreciated. Commercial property is depreciated over 39 years.

3. Review an example. Let's say the purchase price of rental property is $3 million. The county tax assessor assessed the land value to be $1 million and the condo to be $2 million. The recovery period is 27.5 years as discussed in step 1.

4. Divide the value of the condo ($2 million) by the recovery period (27.5). The answer is $72,727, which is the amount that can written off (depreciated) every year on this rental property.

5. Continue to write off the depreciation expense. Subsequent depreciation amounts will continue to be $72,727 until the full value of the rental condo is written off. As depreciation is a non-cash expense, accumulated depreciation is used to balance the expense entry.

References

• Tax Deductions for Rental Property Owners

Resources

• IRS: Publication 527---Residential Rental Property
• Common Landlord Tax Deductions