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Depreciating Rental Property on a Tax Return

Depreciating Rental Property

The IRS allows Landlords to deduct the original cost of rental property from their taxable income by depreciating it over 27.5 years. However, the land must be excluded…

Excluding the Land: Only the dwelling or structure can be depreciated. Since the land never gets used up or worn out, you cannot deduct the portion of the purchase price attributed to the value of the land.

You can depreciate almost any type of structure including homes, multi-family buildings, storage sheds, detached garages, pools, and even landscaping.

Calculating the cost of the deduction is easy. Watch the following instructions to see how:

Determine the “Property Basis”: Take the purchase price of the property and subtract the value of the land.

Calculate the Deduction: Divide the “property basis” amount by 27.5 to determine how much you can deduct each year you own the property (up to a maximum of 27.5 years).

Income Tax Preparation: The IRS Form 4562 is used to report depreciation and amortization. The final figure is reported on Schedule E of your tax return where you deduct it from your gross rental income.

Important: Be sure to maintain accurate records for each rental property including a worksheet showing your calculations. Most tax preparation software should provide proper documentation.