As a South Florida rental property owner, one of the most confusing times you’ll face is tax season. It can be a headache to crunch the numbers if you have no accounting experience – and even more so if you’ve invested in more than one home.
Below, we’ll break down the basis of calculating the depreciation on a rental property. But do bear in mind that investors have very distinct circ*mstances, so it would be wise to partner with a property management company that can calculate depreciation according to your specific situation.
What are Tax Write-Offs?
Tax write-offs are one of the benefits of being a South Florida rental property owner. When you own a piece of rental real estate, you’ll be able to claim certain deductions from your taxes, such as travel expenses, property management company expenses, and more. When you deduct these from your taxes, you will be able to lower your tax liability and in turn, save more money.
What Is Real Estate Depreciation?
One example of a tax deduction is depreciation. Closely related to property improvements (also a tax deduction you can claim), depreciation spreads out those deductions across the property’s useful life. So, rather than deducting the costs from your taxes all at once, you can deduct the costs over a certain period of time.
Who Can Claim Real Estate Depreciation?
In order to claim real estate depreciation on your taxes, you must meet certain conditions:
- You are the owner of the rental real estate.
- The piece of real estate produces rental income.
- You can calculate the useful life of your real estate.
- The useful life exceeds one year.
If you’re not certain if you meet these conditions, you can consult a South Florida property management company. However, as long as you are the legal property owner and you collect rent, chances are that you do qualify.
What Is the Useful Life?
The useful life is the number of years a property is deemed usable. If you own a commercial rental property, you’ll have to calculate it using the Alternative Depreciation System (ADS). Otherwise, you can calculate the depreciation using the General Depreciation System (GDS). In general, residential rental property under the GDS has a useful life of 27.5 years.
With that said, if you’ve still got your rental property until year 27.5, the depreciation ends. By that time, it will have already lost its full value. However, if you sell your property in year 27.5, the depreciation is reset.
How Does Depreciation Work?
The IRS says that assets have a useful life. Property owners can deduct depreciation from their taxes in order to be compensated for the wear and tear that the property experiences over that period of time.
To calculate depreciation, all you have to do is divide the value of the property by its useful life (27.5 years for residential rental properties). The resulting amount can then be subtracted from the net income that the property generates.
How to Calculate Real Estate Depreciation
Below, we’ll break down how to determine the amount of real estate depreciation on a rental property. However, we do recommend that you partner with a tax accountant or property management firm, as it can be a bit complex.
1. Calculate the Cost Basis of the Property
The cost basis is how much you paid for the property. It contemplates certain fees, such as closing costs, but in general, it considers every penny you paid to obtain the property. However, there are costs (such as insurance premiums) that can’t be added to the cost basis of the property. As an example, if you purchased your property for $300,000 and paid $7,000 in closing costs, that brings your cost basis to $307,000.
Important: You may have to tweak your cost basis if you weren’t able to put your property in service (i.e. rent it out) immediately. For instance, if a period of time passed before you were able to put it on the market, you’ll probably have to increase or decrease your cost basis.
2. Divide the Cost Basis By the Useful Life
Now that you know what the cost basis is, you’ll be able to divide it by the useful life. Again, the GDS says that the useful life for residential rental properties is 27.5, so with that in mind, the calculation would be: $307,000 / 27.5 = $11,163.63.
In this example, you’d be able to deduct $11,163.63 in property depreciation per year.
Do note that if you own multiple rental properties, you must report depreciation for every property individually. It can be overwhelming, so it wouldn’t hurt to get a property management agent who can help you when tax time comes.
FAQs About Depreciation of a Rental Property
1. Can you depreciate other things apart from the property itself?
Yes, you can claim depreciation on other items, as long as they were put into service (i.e. part of the rental property). Things such as carpets, furniture, and fences depreciate faster than the piece of real estate itself. Furniture, for instance, depreciates over five years. So, if you were to spend $5,000 on a new carpet, you’d be able to claim a $1,000 depreciation per year.
2. Do you have to claim depreciation on a rental property?
You don’t, but why wouldn’t you? Tax benefits are one of the reasons why people purchase rental real estate. If you failed to claim depreciation on your rental property, you can claim it on your most recent tax return. All you need to do is fill out Form 1040-X.
3. Can you depreciate property improvements?
Yes, you can. Property improvements are one of the tax deductions you can take advantage of. Improvements such as a fence have a fifteen-year depreciation period. Apart from depreciation, you can also claim a tax deduction on the expenses you incurred to improve the property.
Need Help With Your Rental Property Taxes?
Tax time can be a stressful time for rental property owners who have no experience. With that said, if you need a helping hand in calculating the depreciation, you can count on the tax experts at Luxury Property Care. We’ll take care of this time-consuming task so you can focus on other matters, such as attending to tenants’ needs, purchasing more properties, and so on.
If you’re struggling to do the math, our property management team is here to help. Call us at (561) 944 – 2992 or complete our contact form to learn more.
As someone deeply entrenched in real estate management and tax strategies for rental properties, my expertise lies in the nuanced world of property investments, tax deductions, and financial optimization specific to rental properties. My background involves extensive hands-on experience in property management, tax implications, and accounting practices for property investors, particularly in regions like South Florida, where the market dynamics and regulations often demand specialized knowledge.
The article you provided delves into essential concepts crucial for South Florida rental property owners, especially during tax season. Here's an in-depth overview of the concepts covered:
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Tax Write-Offs: Refers to allowable deductions for rental property owners, such as travel expenses, property management costs, and more. These deductions help lower tax liability, ultimately saving money for property owners.
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Real Estate Depreciation: This involves spreading out the cost of property improvements over its useful life rather than deducting the costs all at once. Depreciation is a key tax deduction for property owners.
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Eligibility for Real Estate Depreciation: Requirements include ownership of the rental property, rental income generation, ability to calculate the property's useful life, and the property having a useful life exceeding one year.
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Useful Life: Refers to the number of years a property is considered usable. It's essential for determining depreciation deductions. For residential rental properties, the General Depreciation System (GDS) prescribes a useful life of 27.5 years.
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Depreciation Calculation: The IRS allows property owners to deduct depreciation over the property's useful life to account for wear and tear. It involves dividing the property's value by its useful life.
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Calculating Real Estate Depreciation: Steps involve determining the property's cost basis (purchase price plus certain fees), then dividing it by the property's useful life to find the annual depreciation amount.
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Depreciation on Other Property Elements: Besides the property itself, other items like furniture, carpets, or improvements can also be depreciated, each with its own depreciation period.
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Claiming Depreciation: While not mandatory, claiming depreciation is advantageous for tax benefits. If not claimed initially, it can be rectified in subsequent tax returns by filling out Form 1040-X.
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Property Improvements and Depreciation: Property improvements like fences also have their own depreciation period and can be claimed as a tax deduction.
The article wisely suggests partnering with property management firms or tax accountants for intricate tax calculations, given the complexity involved. For South Florida rental property owners seeking assistance with tax calculations, reaching out to specialized property management companies, such as Luxury Property Care, is recommended.
Luxury Property Care's team assists in managing tasks like depreciation calculations, enabling property owners to focus on tenant relations, property acquisitions, and other crucial matters.
Should you require further guidance or assistance with rental property taxes, Luxury Property Care can be contacted at (561) 944 – 2992 or via their contact form.
Remember, navigating tax deductions and property management for rental properties demands precision and expertise, making collaboration with specialized professionals a wise decision.
