{"id":161392,"date":"2023-10-30T15:19:36","date_gmt":"2023-10-30T21:19:36","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=161392"},"modified":"2024-02-28T14:12:19","modified_gmt":"2024-02-28T21:12:19","slug":"what-is-depreciation-in-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-is-depreciation-in-real-estate","title":{"rendered":"What Is Depreciation in Real Estate?"},"content":{"rendered":"\n<p>You\u2019ve likely heard of depreciation on equipment and other items in business, but did you know depreciation in real estate is possible? In fact, it\u2019s one of the most important <a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-taxes-deductions\" target=\"_blank\" rel=\"noreferrer noopener\">deductions<\/a> you can take as a real estate investor, as it reduces your taxable income each year you have a property in service and available for rent.<\/p>\n\n\n\n<p>So, what is depreciation in real estate, and how does it work?&nbsp;<\/p>\n\n\n\n<p><strong><em>Related: <\/em><\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/rookie-255\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><em>How to (Legally) Avoid Taxes by Investing in Real Estate<\/em><\/strong><\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What It Means When Real Estate Depreciates<\/h2>\n\n\n\n<p>Real estate depreciates over time, meaning it slowly loses its value as it ages compared to its value when you purchased it. This is through normal wear and tear and intended use.<\/p>\n\n\n\n<p>The IRS helps real estate investors offset the cost of purchasing investment properties by offering annual depreciation. If you invest in residential real estate, the IRS factors the depreciation over 27.5 years, the average useful life.<\/p>\n\n\n\n<p>The deprecation deduction can help offset income earned from owning a rental property, such as rental income or any other income from other provided amenities.&nbsp;<\/p>\n\n\n\n<p>Depreciation isn&#8217;t cash you put out or earn; instead, it is an accounting term that lowers your income on paper and reduces your tax liability.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How Is Real Estate Depreciated?<\/h2>\n\n\n\n<p>The IRS uses the<a href=\"https:\/\/www.irs.gov\/publications\/p946\" target=\"_blank\" rel=\"noreferrer noopener nofollow\"> Modified Accelerated Cost Recovery System<\/a> to depreciate real estate. Any investment property you purchase after 1987 is subject to this system and can be depreciated over 27.5 years, or a property\u2019s typical useful life.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is the Most Common Depreciation Method?<\/h2>\n\n\n\n<p>There are two types of depreciation: straight line and accelerated. However, straight-line depreciation is the most commonly used method. It\u2019s the simplest method, as it provides a fixed amount of depreciation annually based on the property\u2019s cost basis.<\/p>\n\n\n\n<p>Accelerated depreciation allows property owners to deduct a larger percentage of the cost basis in the first year or first couple of years but leaves nothing for depreciation for the remainder of its useful life.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Calculating depreciation<\/h3>\n\n\n\n<p>To calculate real estate depreciation, you must know the following:<br \/><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Property\u2019s cost basis (purchase price, plus any other acquisition costs)<\/li>\n\n\n\n<li>Expected useful life (IRS uses 27.5 years)<\/li>\n<\/ul>\n\n\n\n<p>When calculating the property&#8217;s cost basis, determine its purchase price plus any capital expenditures, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Legal fees<\/li>\n\n\n\n<li>Surveys<\/li>\n\n\n\n<li>Title insurance<\/li>\n\n\n\n<li>Recording fees<\/li>\n<\/ul>\n\n\n\n<p>From the cost basis, you must subtract the land&#8217;s value, as land doesn&#8217;t depreciate.<\/p>\n\n\n\n<p>For example, you purchased a property for $275,000. The appraiser determined the lot was worth $20,000, and your capital expenditures to purchase the property are $4,000. Your cost basis for the property is as follows:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>$275,000 purchase price<\/li>\n\n\n\n<li>Subtract $20,000 land value<\/li>\n\n\n\n<li>Add $4,000 capital expenditures<\/li>\n<\/ul>\n\n\n\n<p>Your cost basis is $259,000. If you put the property in service by Jan. 1, you&#8217;d divide $259,000 by 27.5 years for an annual depreciation of $9,418.18.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Tax Benefits of Depreciation on Real Estate<\/h2>\n\n\n\n<p>Depreciation greatly affects your tax liability for the year because it is an expense on Schedule E that directly lowers your income.&nbsp;<\/p>\n\n\n\n<p>Depreciation lowers your income and affects your net gain or loss on the property. You combine depreciation with other expenses to lower your overall tax liability.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What can\u2019t you depreciate?<\/h3>\n\n\n\n<p>In addition to land, there are a few other costs you cannot use in your acquisition costs to determine a property\u2019s cost basis.<\/p>\n\n\n\n<p>These include certain settlement fees, such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Origination points<\/li>\n\n\n\n<li>Mortgage insurance premiums<\/li>\n\n\n\n<li>Fire insurance premiums<\/li>\n\n\n\n<li>Appraisal fees<\/li>\n<\/ul>\n\n\n\n<p>You also cannot depreciate property you bought and sold in the same year or equipment used to make capital improvements to the property.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">When Can I Start Depreciating My Property?<\/h2>\n\n\n\n<p>Real estate depreciation begins when the property is placed in service or made available for service.&nbsp;<\/p>\n\n\n\n<p>For example, say you buy a rental property on Jan. 5, but it takes three months to renovate it, making it available for rent on May 1. You can begin taking depreciation on May 1, even if it isn&#8217;t rented out yet.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How Much Is Depreciation?<\/h2>\n\n\n\n<p>The amount of depreciation you can take varies based on the property\u2019s cost basis and when you put the property into service. You cannot deduct depreciation for times you sit on the property idle, not making it available for rent.<\/p>\n\n\n\n<p>For each full year the property is in service, you can deduct 3.636% of your cost basis. If you put the property in service midyear or anytime after Jan. 1, you\u2019ll get a<a href=\"https:\/\/www.irs.gov\/publications\/p527#en_US_2022_publink1000219092\" target=\"_blank\" rel=\"noreferrer noopener nofollow\"> prorated amount of depreciation<\/a> for that year. The prorated amount depends on when you put it into service:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Month Put in Service<\/strong><\/td><td><strong>Depreciation Percentage (First Year)<\/strong><\/td><\/tr><tr><td>January<\/td><td>3.485%<\/td><\/tr><tr><td>February<\/td><td>3.182%<\/td><\/tr><tr><td>March<\/td><td>2.879%<\/td><\/tr><tr><td>April<\/td><td>2.576%<\/td><\/tr><tr><td>May<\/td><td>2.273%<\/td><\/tr><tr><td>June<\/td><td>1.970%<\/td><\/tr><tr><td>July<\/td><td>1.667%<\/td><\/tr><tr><td>August<\/td><td>1.364%<\/td><\/tr><tr><td>September<\/td><td>1.061%<\/td><\/tr><tr><td>October<\/td><td>0.758%<\/td><\/tr><tr><td>November<\/td><td>0.455%<\/td><\/tr><tr><td>December<\/td><td>0.152%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>This means you can depreciate $3,636 each year for every $100,000 in a property\u2019s cost basis for each full year the property is in service.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is Depreciation Recapture?<\/h2>\n\n\n\n<p>Property depreciation is a benefit while you own investment properties. However, when you sell the property for a profit, the IRS wants their portion of the earnings in the form of depreciation recapture.<\/p>\n\n\n\n<p>Depreciation recapture means you pay taxes on any depreciation you\u2019ve taken while you own the property at a rate of 25%.&nbsp;<\/p>\n\n\n\n<p>Any capital gains on the property exceeding the depreciation recapture are taxed at your capital gains rate of 0%, 15%, or 20%, depending on your tax bracket.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Strategies to Manage Depreciation as a Real Estate Investor<\/h2>\n\n\n\n<p>To manage your depreciation and make the most of the deduction, consider the following:<br \/><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Keep up the property\u2019s useful life with regular maintenance.<\/li>\n\n\n\n<li>Make improvements and upgrades to increase the property\u2019s cost basis.<\/li>\n\n\n\n<li>Reinvest profits, such as with a<a href=\"https:\/\/www.biggerpockets.com\/blog\/1031-exchange\" target=\"_blank\" rel=\"noreferrer noopener\"> 1031 exchange<\/a>, to avoid depreciation recapture.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Final Thoughts<\/h2>\n\n\n\n<p>The answer to what depreciation in real estate is important, as it&#8217;s one of the main deductions you can take as a real estate investor. You can continually increase your depreciation deduction by improving properties and keeping them in business.<\/p>\n\n\n\n<p>You can also avoid depreciation recapture by taking advantage of 1031 like-kind exchanges until you&#8217;re ready to stop investing in real estate. While you invest, though, depreciation is one of the most important deductions you can take.<\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_880e0efc7bc005ab977d15f767265de0\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_0492f02fa85328296ba19c2c96b32e56\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_2af103d516d4531a26acb8ccefcbe475 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Agent Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/what-is-depreciation-in-real-estate&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? 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In fact, it\u2019s one of the most important deductions you can take as a real estate investor, as it reduces your taxable income each year you have a property in service and available for rent.<\/p>\n","protected":false},"author":613677,"featured_media":161393,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7377,5524],"tags":[],"class_list":["post-161392","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-strategies","category-real-estate-investing-for-beginners"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/161392","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613677"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=161392"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/161392\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/161393"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=161392"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=161392"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=161392"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}