Depreciation: Learn the Basics Ahead of Tax Day!

by | BiggerPockets.com

Depreciation is one of those terms you kind of know you should know as an investor but put off learning about. If you’re like me, maybe you tucked it away in the back of your mind as something you’ll address at another time—or maybe have your accountant address it for you. (You swear, you’ll figure it out another day.)

Well, taxes are due soon, so today should be the day! And, as it turns out, depreciation is probably a much simpler concept than you though.

(Nevertheless, you should 100 percent consult with your accountant about everything you’ll read about here!)

What Is Depreciation?

So, here it is in a nutshell. Depreciation refers to the concept that when you buy something, through use, wear and tear, weathering, and so on, it degrades. Much like your car loses its luster over time, so does your real estate.

This all sounds like a bummer, but there’s an upside! Depreciation allows for a tax benefit for that degradation. Let’s discuss what that looks like. (Note: I will not discuss depreciating improvements here.)

taxes, rental property, real estate investor, rental income

What can’t I depreciate?

To be sure, there are rules when it comes to writing off depreciation. Here’s what does not qualify for a depreciation deduction on your tax return.

  1. You cannot depreciate land, so you (or your accountant) will need to establish what the structure is worth versus what the land is worth and only depreciate off the structure.
  2. You can no longer depreciate a property if you move into it yourself.
  3. You can no longer depreciate a property that’s been fully depreciated (meaning, you’ve depreciated it past 27.5 years).

What qualifies for depreciation?

  1. The property is an investment or some sort of business (aka the property is not your primary residence).
  2. You own it for at least one year.
  3. It endures wear and tear.
  4. You own the property.

By these standards, pretty much all real estate investments should fit.

closeup of hand using scissors to cut paper that reads taxes

When can I start depreciating my property?

You can start depreciating your place when it is ready for rental. Attention, I did not say when it is rented. If you buy a property and are ready to rent it day one—but it doesn’t end up renting until day 14—you can start depreciating it from day one.

How much is the depreciation? 

  1. You can depreciate a property for 27.5 years.
  2. For every full year you own that property, you can depreciate it by 3.636%. So, if you buy a property that is worth $100K after you subtract the land value, you can depreciate it by $3,636 per year.
  3. If you purchase a property mid-year, for the first year, you have to depreciate via a schedule (lower depreciation as you get further into the year). Good news, you can find that schedule here.

In its simplest form, that’s depreciation! If you’ve used it to your benefit in a way I didn’t outline in this article, I’d love to hear more about it.

What other questions do you have about depreciation? 

Let’s discuss in the comment section.

About Author

Erin Spradlin

Erin Spradlin co-owns James Carlson Real Estate. She loves working with first-time homebuyers for their enthusiasm and excitement, and loves working with investors because she's a fellow spreadsheet nerd. She and her husband own three properties in metro Denver and are currently in the process of acquiring a duplex in Colorado Springs. You can find Erin's blogs here: https://www.biggerpockets.com/renewsblog/author/erinspradlin/ and her airbnb video series here: https://www.youtube.com/playlist?list=PLgSUZKLPRI9tK3Vd-qpH3Sk2Rh-_pIrNN.

4 Comments

  1. Heshel Mangel

    Well written article. Sometimes I think I can write for BP when I see these type of articles. Something I was hoping to see here, was about the recapture of depreciation. Everyone talks about the tax deduction but no one talks about what happens when you sell and recapture all that you deducted.

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