1. What is Rental Home Depreciation?

Rental home depreciation is a tax deduction that allows property owners to recover the cost of income-producing property over time. The IRS allows residential rental properties to be depreciated over 27.5 years.

2. How Depreciation is Calculated

The calculator uses the standard depreciation formula:

Where:

• Cost Basis - The original purchase price plus any capital improvements
• Land Value - The value of the land (not depreciable)
• 27.5 - The number of years over which residential rental property is depreciated

Explanation: Only the building value (cost basis minus land value) can be depreciated, spread evenly over 27.5 years.

3. Importance of Depreciation

Details: Depreciation reduces taxable income from rental properties, potentially saving thousands in taxes each year. It's a non-cash expense that provides real tax benefits.

4. Using the Calculator

Tips: Enter the total cost basis (purchase price plus improvements) and the land value. The calculator will determine your annual depreciation deduction.

5. Frequently Asked Questions (FAQ)

Q1: Why can't land be depreciated?
A: Land doesn't wear out, become obsolete, or get used up like buildings do, so IRS rules prohibit depreciating land.

Q2: What's included in cost basis?
A: Purchase price plus settlement fees, legal costs, and any capital improvements (not repairs) made to the property.

Q3: When does depreciation begin and end?
A: Depreciation begins when the property is placed in service (ready to rent) and ends after 27.5 years or when the property is sold.

Q4: What if I sell the property?
A: You may need to pay depreciation recapture tax on the total depreciation taken when you sell.

Q5: Can I accelerate depreciation?
A: In some cases, through methods like cost segregation studies that identify shorter-life components of the property.