Back HomeWhat is Rental Property Improvement Depreciation?
When learning about effective property management, College Station real estate investors must develop a deep understanding of rental property improvement depreciation and how it can potentially lower their taxable income in time for tax season.
What is rental property improvement depreciation?
Maintaining rental property entails certain costs and expenses. However, there are several items that can be deducted from your tax liability for the current year. These items include repairs and improvements, though the latter requires depreciation before it can be considered deductible.
Real estate investors use depreciation to deduct the purchase price and costs of improvement for their tax returns. Depreciation begins as soon as a rental property is made available to tenants. Instead of making one large deduction from the year in which you purchased or made improvements to the property, the process of depreciation distributes the deductible amount across the useful life of the rental.
The Internal Revenue Service (IRS) has guidelines on depreciation. According to the agency, a rental property is eligible for depreciation if it meets the following requirements:
- You lawfully own the property even if it is subject to debt
- You use the property for business or income generating purposes
- The rental property has a determinable useful life (it decays, wears out, becomes obsolete, gets used up, or loses value due to natural causes)
- The rental property is expected to last for longer than one year
Keep in mind that the property cannot be depreciated if you placed it in service and then disposed of it (or stopped using it for business purposes) in the same year. Land is not considered depreciable as it never decays or gets used up. Further, you cannot depreciate the costs of clearing, landscaping, or planting on land.
You can keep claiming a depreciation deduction for rental property that is only temporarily not being used. If you make repairs or improvements after a tenant moves out, you can continue to depreciate the rental while getting it ready for the next occupant.
You can continue to depreciate property until you meet one of the following conditions:
- You have already deducted the entire cost or other basis in the property
- You have retired the rental from service even though you haven’t fully recovered its cost or other basis
A rental property is considered retired from service when you stop using it as an income-producing property. For example, your rental property is retired if you sell, abandon, destroy, or convert it for personal use.
What is the difference between repairs and improvements?
According to the IRS, repairs are changes that don’t add significant value to rental property or extend its usable life. When making repairs, you can deduct the expense immediately from your tax liability for the year. The IRS has guidelines for determining whether an expense is classified as a repair or has to be depreciated before it can become deductible.
It defines improvements as changes that must be capitalized and results in the betterment of rental property by restoring or adapting it to new or different use. In general, betterments, restoration work, and adaptations must be capitalized and depreciated.
How to calculate depreciation
There are several factors that will impact the amount of depreciation you can deduct each year. These include your basis in the property, depreciation method, and recovery period. The Modified Accelerated Cost Recovery System (MACRS) is the depreciation method used for all residential rental property that has been placed in service after 1986.
This accounting technique spreads the costs and depreciation deductions for a rental property over a period of 27.5 years, or the amount of time that the IRS considers to be the useful life of a residential rental property.
It’s advisable to work with a qualified tax professional when calculating depreciation for improvements to your rental property. A tax accountant will help you determine your basis in your rental property as well as separate the cost of the land and the structures on the property. They will also help you determine any other deductibles that can help lower your tax amount for the year and allow you to maximize your tax advantages.
For more information on Berkshire Hathaway property management, get in touch with Berkshire Hathaway HomeServices Caliber Realty. Their team of real estate professionals will help you locate your next investment in College Station and provide assistance with property management and leasing.
With over 60 years of combined experience in management, their property management staff knows will keep your rental property in top condition and generate a steady stream of rental income. Call them at 979.694.8844 or send them a message to get started.
