Landlords can also deduct rental property depreciation…
In part 1 and part 2 of this article, we explained that the services and expenses that you paid for could be included as deductions on your tax return.
In addition to these expenses, you can deduct the depreciation of your rental property.
In other words, you can deduct the “wear and tear” costs of the rental property, including any improvements.
Confused? No worries! Keep reading and we’ll get to the bottom of what depreciation means, and explain what types of improvements you can include on your tax return.
What Does “Depreciation” Mean?
For tax purposes, you can deduct the cost of your property along with any improvements you made to it, in the form of depreciation.
Think of depreciation as a way to recover the costs associated with your rental property.
You won’t deduct the cost of buying or improving your rental property as one large tax deduction. Instead, you’ll spread the costs across the “life” of the property.
The amount you can depreciate is dependent on a variety of factors, such as how long the property (or improvement) will last and what it is. To learn more, visit IRS Publication 527, Residential Rental Property.
What Qualifies?
Owning a piece of property does not automatically qualify you to deduct it’s depreciation value. To deduct the depreciation of a rental property, the IRS requires that you also meet the following criteria:
- The property produces income (in other words, you rent it out).
- The property has a “useful life”, meaning it will eventually wear out, get used up, etc. (For example, a house has a useful life while an unused piece of land you own does not.)
- The useful life of the property is longer than one year.
What Can Be Included When Figuring Depreciation?
In addition to the cost of the property itself, you can depreciate the costs of any improvements you made to the property.
What’s considered an “improvement”? For example, does a new fence count as an improvement? How about installing a wheelchair ramp?
Yes. An improvement is anything that:
- enhances the value of the property
- adds to the usefulness of the property
- restores the property to new or like-new condition or
- adapts or changes the property to a new use
If you installed any of the following items, you can include it as an improvement on your tax return:
- heating system
- central air conditioning
- plumbing system (including pipes, drains, bathtubs, toilets)
- electrical system (this includes wiring, outlets, junction boxes, connectors, etc.)
- a security system
- new wall-to-wall carpeting or hardwood flooring
- garage addition
- renovated kitchen
Photo via Eduardo on Flickr
