Many rental property investors fail to comprehend numerous tax advantages that they are entitled too, in particular, real estate depreciation. When you own a rental property, you are bound to receive tax advantages. Real estate depreciation can be defined as an income tax deduction wherein a taxpayer can retrieve the expenses or other costs. A depreciation schedule can bring down the taxable income of investors. A large number of investors also call it; a phantom expense. The IRS allows investors to avail tax deductions on the basis of an apparent decline in the real estate’s value. Real estate depreciation expects that rental property’s value dip over a period of time due to wear and tear. The investor may get cash flow from the property and may reflect tax loss courtesy because of real estate depreciation.
Advantages of displaying investment property tax depreciation
You can avail the advantages when you show investment property tax depreciation. The main advantage is that it can bring down the overall tax burden. It can also benefit real estate investors as they can save a substancial chunk of money every year on their taxes.
Investment properties that can be depreciated for tax deductions
If you want to make your property eligible for depreciation, you need to meet certain requirements. The taxpayer needs to have possession of the rental property and can also depreciate capital improvements. You must use the property in business or income-generating activity. If a taxpayer uses the property for business as well as for personal reasons, they can only deduct depreciation for business use. And, the property needs to have a calculable advantageous life of more than one year. You may seek some professional advice on how to calculate the exact depreciation residential rental property.
Tips to calculate real estate depreciation
It is not a mammoth job to calculate the exact real estate depreciation. You can carry out the calculation in 3 easy steps given below:
- The real estate value is constituted by land and building values. And, depreciation applies only to the building. The first and foremost step is to allocate the property’s purchase cost. After that, the purchase cost must be allocated between the land and building value.
- As you know the land is not liable for depreciation, it is the building that will be subject to depreciation. The building is to be depreciated over the IRS prescribed useful life. The life is labeled as 27.5 years for residential rental property and 39 years for commercial land. Now you ought to divide the building value by 27.5 to obtain the depreciation expenditure. You can also take the help of experts to prepare the rental property depreciation schedule.
- Now you need to multiply the depreciation expenditure by the marginal tax rate. This will give you property tax savings from real estate depreciation.
Real estate depreciation is a vital tax deduction for the scores of real estate investors. The real estate investors must not neglect it. It is crucial for investors to comprehend the fundamentals of depreciation. It will offer benefits to investors with tax planning. They will also comprehend the important after-tax investment returns. In the longer run, it will help them in claiming depreciation on a rental property.