How Rental Property Depreciation Works

Real estate can be an incredible long-term investment. If you  you can also take advantage of a tax benefit called depreciation. 

Depreciation can save you a bit on your annual tax return. But there are some to get the most out of it and avoid unpleasant surprises when you sell your property.

What is depreciation, and how does it work?

Understanding Real Estate Depreciation 

Depreciation rules are part of the tax code, and they allow you to reduce your taxable income by the cost of your property over time. Before we go further, let’s clarify what will depreciate over time versus what you can expense immediately.

• The IRS allows you to deduct some rental property expenses from your income at the onset. For example, if you repair a window or mow the grass. These types of costs are NOT depreciated but deducted in their entirety for the tax year they occur.
• Other costs are capitalized, which means added to the price of the property, and deducted over the “useful life of the property.” It’s at this stage where depreciation comes into play. Common examples are the property’s purchase cost, plus any improvements to the property, like adding a room or building a privacy fence.

When an item is depreciated, you split up the deductions over several years instead of a lump sum. We already mentioned that the property’s purchase cost is usually the primary depreciable item. However, part of the price you paid for the house was for the dirt the home sits on. Here comes a massive rule.