Ask the tax adviser
Rental property depreciation
Dear Tax Talk:
I have a rental residential property and I need to calculate the
depreciation on it. What is the formula for figuring depreciation?
Thanks very much,
It seems this week I got more questions on depreciation than I get
all year, so I picked yours to give an example.
Depreciation is a tax deduction
intended to recover the cost of your investment that generates income.
Since most real property appreciates, it seems contrary to allow
a deduction for depreciation. But think of depreciation as cost
recovery and it might make more sense.
That said, reduce the cost
of your real property by the value of the land since land is not
depreciable. If you don't know how much the value of the land is,
use a ratio such as you might find on your real property tax bill.
Or, if you can't find a ratio, use 5 percent to 20 percent of the
Since you have residential
rental property, you need to find its useful life for tax purposes.
Useful life or recovery period is the period over which you will
recover your cost using the Modified Accelerated Cost Recovery System
or MACRS (pronounced makers) that applies to most depreciable assets
since 1986. Most property located in the United States is depreciated
under the General Depreciation System.
For residential rental real
estate, the recovery period is 27.5 years as you might well find
if you reach page 29 of IRS
Publication 946. Real property is depreciated the same amount
every year except the first year, when your depreciation depends
on the month you acquire the property or place it in service. For
example, say you bought a condo in January but improved it until
June when you listed it for rent. You then had a tenant move there
in September, but it is considered placed in service in June when
it was available for rent. Table A-6 on page 69 of Publication 946
provides that for property placed in service in the sixth month
of the year you multiply your cost by 1.97 percent to determine
your recovery deduction.
For example, if the condo
cost $100,000 of which $5,000 is land and you made $15,000 in improvements
plus installed $5,000 in appliances, your depreciable building cost
is $110,000 ($100-5+15). You calculate the appliance depreciation
over a different recovery period. Page 27 of Publication 946 tells
you that appliances are five-year assets. Table A-1 on page 67 gives
you the percentages for five-year assets, which in the first year
is 20 percent. Therefore, your depreciation deduction is $3,167
reported on Form
4562 as follows:
$110,000 x 1.97 percent = $2,167 Line 19h
$5,000 x 20.00 percent = $1,000 Line 19b
-- Posted: March 27, 2003