Depreciation On Rental Properties: What Expenses Can Be Depreciated?
As a rental property owner, depreciation can help you save on your taxes. Find out what expenses can be depreciated before you file your next tax return.
If you’re a rental property owner, it’s important to understand how depreciation works and what rental property expenses can be depreciated. In this post, we’ll explain what rental property depreciation is, how cost segregation affects depreciation, what expenses can be depreciated, and how to claim depreciation on rental property.
Table of Contents
What Is Rental Property Depreciation?
Rental property depreciation allows property owners to write off the costs of purchasing and improving rental property on their income tax returns. Typically, a rental property depreciates at a rate of about 3.6% per year for 27.5 years. Depreciation begins after the property is available to rent.
Rental property owners can also accelerate depreciation on certain assets with a tax strategy known as cost segregation.
Rental Property Expense Depreciation With Cost Segregation
If you own a commercial or rental property, you can accelerate the depreciation of certain assets using cost segregation. This starts with a cost segregation study, which is used to identify and classify assets that can be depreciated over a shorter timeline of five, seven, or 15 years.
If you qualify for cost segregation, accelerating depreciation by reclassifying qualified assets into shorter tax lives can significantly reduce income tax liability and increase cash flow, allowing you to further invest in your properties. In addition to accelerated depreciation, you can further maximize tax benefits with bonus depreciation for the first year certain property is placed into service.
What Rental Property Expenses Can Be Depreciated?
According to the IRS, rental property can be depreciated if it meets the following conditions:
- You own the property
- The property has a determinable useful life
- The property is expected to last for longer than a year
- The property is used in your business or as part of an income-producing activity
The standard depreciation rate applies to the buildings on your property. Land is not depreciable and is therefore not calculated into the value of your property.
If you have a cost segregation study performed on the property, certain assets may be depreciated on an accelerated schedule. This includes:
- Built-in cabinets
- Window treatments
- Strippable wallpaper
- Decorative moldings
- Accent lighting
- Dedicated outlets
- Sidewalks & curbs
What Rental Property Expenses Can’t Be Depreciated?
Land is not a depreciable asset, so it must be excluded when calculating the value of your property for depreciation.
Several building components can be depreciated over the standard 27.5 years but do not qualify for accelerated depreciation. This includes:
- Concrete slabs & foundations
- Interior & exterior doors & hardware
- Permanent flooring (such as ceramic tile or hardwood)
- Electrical systems
- HVAC systems
- Essential interior & exterior lighting
- General millwork (including stairs, mantels, door and window frames, etc.)
- Gas & sewer systems
- Site prep, grading, & excavation
How To Claim Rental Property Depreciation
Rental property depreciation is claimed on IRS Form 4562, Depreciation and Amortization. This form is submitted with your annual federal income tax return.
This form is also used to claim depreciation following a cost segregation study if the study is completed in the year the property is put into service. If you have a cost segregation study performed later, you can claim “catch-up” depreciation by using Form 3115, Application for Change in Accounting Method.
Form 3115 can also be used to correct errors, such as depreciation omissions. Other depreciation errors, such as correcting inaccurate calculations, may require you to file an amended tax return.
The Bottom Line On Rental Property Depreciation
While depreciation on your rental property can help you save money come tax time, an error in calculations can cost you hefty penalties and fees. This is why we recommend consulting with a tax professional or accountant to ensure depreciation is accurately calculated and reported to the IRS. These experts can also help you identify other money-saving tax benefits.
Furthermore, you should consider cost segregation to get the most out of depreciation. By classifying assets, accelerating depreciation, and even receiving bonus depreciation, you can significantly cut your tax liability — or even see a refund from your tax return. To get started, check out our picks for the best cost segregation companies. Then, schedule your free initial analysis to see how you can benefit from cost segregation for your rental property.