- Written by Marieke Einbrodt
- Approx — 5 Min Read
Tenants' expenses that landlords can claim as deductions when filing their tax returns. - Landlords may provide these expenses in their annual tax submissions.
For Landlords:* Real Estate* Depreciation
Savvy landlords can snag a tax break by claiming depreciation costs on their rental properties. Here are the key components that usually qualify for these deductions:
💰 Depreciable Costs:The cost of the building itself qualifies for depreciation, but not the land beneath it. For example, if you shelled out $300,000 for a rental unit, and the land is valued at $60,000, then only $240,000 would be considered depreciable.
📅 Depreciation Timeline:The IRS allows depreciation of residential rental properties to be spread out over 27.5 years. Put simply, each year you can subtract ( \frac{1}{27.5} ) of the building’s original cost from your taxes. Using the $240,000 depreciable amount from our example, the annual deduction would be around ( \frac{240,000}{27.5} ), which translates to approximately $8,727 per year.
⏰ Depreciation Kickoff:Depreciation starts when your rental is ready and available to be leased, not when it's occupied or purchased.
💰 Tax Advantages:Depreciation is a non-cash deduction that lowers your taxable income and, consequently, your tax bill. It's typically reported on IRS Schedule E.
🤝 Depreciation Recapture:When it comes time to sell your rental property, the IRS requires you to pay back the depreciation deductions you've taken over the years. These recaptured amounts are taxed at a maximum rate of 25% as ordinary income.
Just remember - before making any moves, always consult a tax professional to ensure you're following the most up-to-date rules and regulations. Happy saving! 💰🏠
Landlords can save on their tax bill by claiming depreciation costs on their rental properties. The depreciable cost of a rental property is the cost of the building itself, not the land, and includes any improvements made. Depreciation is a non-cash deduction that lowers a landlord's taxable income and tax bill, and is typically reported on IRS Schedule E. However, when the property is sold, the IRS requires the landlord to pay back the depreciation deductions they've taken over the years, which are taxed at a maximum rate of 25% as ordinary income. It's advisable for landlords to consult with a tax professional to ensure they are following the most up-to-date rules and regulations.