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Depreciating foreign real estate


Dear Tax Talk,
You previously addressed the matter of reporting the sale of a property located in Mexico. You spoke of expenses including depreciation. Can you tell me if depreciation of foreign rental property is calculated in the same manner as if it was situated in the states? -- Bob

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Dear Bob,
It's nice to hear from a regular reader of my column.

Depreciation is an allowable deduction that allows an investor or business to offset the cost of capital against income. Depending on the type of income-producing asset, depreciation is calculated on an accelerated or straight-line basis over the asset's economic or useful life.

For example, computers are depreciated on an accelerated basis known as double declining balance over five years and residential rental property is depreciated on straight line basis over 27.5 years. These norms fall under the general depreciation system of the modified accelerated cost recovery system, usually referred to as MACRS (rhymes with acres).

In certain instances, you cannot use the general depreciation system and must instead use the alternative depreciation system. One of these instances is in the case of tangible property predominantly used outside the United States such as the rental property in Mexico.

Under the alternative depreciation system, you don't get to accelerate your deductions as much as under the general depreciation system (in fact, since 1999 you have to use straight-line) and you have to use a longer depreciable life. This means that foreign-based residential rental property is depreciated over 40 years instead of 27.5 years. On a $100,000 rental property, your annual depreciation deduction would be $3,636 for U.S. situated property vs. $2,500 if located outside the country.

-- Posted: May 19, 2004




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