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Rental Property Depreciation Examples

The first year of depreciation on a rental property will differ depending on the month first made available as a rental.

When computing annual taxes rental properties are depreciated using a 27.5 year schedule. Our depreciation calculator can figure this for you but it is best to go through some simple examples in order to insure it's done properly. What month a property is purchased and when it is initially available as a rental are important.

Example 1 - Bob buys a house as a rental and he closes in June, 2010. The house is already rented when he buys it. He pays $200,000 for the house and from the property tax records he ascertains that the lot is worth $25,000 which leaves $175,000 as the value of the house itself ($200,000 total minus $25,000 lot value). His first four years' depreciation deductions, then, would look like this:

· 2010 - $3448 (2010 tax year filed April 15, 2011)
· 2011 - $6363
· 2012 - $6363
· 2013 - $6363

Depreciation started in June because that's when Bob closed on the property, it was already a rental and he continued to rent it out. The first year figure (and subsequent years) is calculated via a simple chart published by the IRS. Even without the chart the depreciation can be figured quickly as residential property rentals can only be depreciated via straight-line depreciation (the simplest form). This works out to 3.636% of the property value (less the land value) each year except the first and last years, with those years being determined by what month the property was turned into a rental. (See also our easy depreciation calculator.)

Example 2 - Bob buys a house as a rental and he closes in June, 2010. This time the house is not rented but Bob immediately puts it up for rent. He finds a tenant in August. His first four years looks exactly the same as the first example (assuming the same priced house):

· 2010 - $3448
· 2011 - $6363
· 2012 - $6363
· 2013 - $6363

The reason this is the same is that even though the house was empty when purchased Bob is still using it as a rental property. The fact that Bob doesn't have a tenant yet and won't until August makes no difference. Bob bought it and put it up for rent in June so his depreciation begins in June.

Example 3 - Bob buys a house as a rental and again he closes in June, 2010. The house needs some repairs and some paint to get it rent ready. Bob gets this done in July and puts it up for rent August 1. He finds a tenant before the month is out and the tenant moves in on September 1st. Bob's depreciation is as follows:

· 2010 - $2387
· 2011 - $6363
· 2012 - $6363
· 2013 - $6363

In this case Bob's depreciation starts in August (thus the lesser amount for the first year) because that is when the property became rent ready and Bob put it up for rent. Again, finding the tenant and when the tenant moved in is not that important. The focus is on when it was ready and available for rent. If Bob would have finished the work in July but for whatever reason not bothered to even try and get a tenant until September then his depreciation expense would have not started until September!

All three of these examples make some common assumptions. First we're assuming Bob made no additions or improvements to the house as these would have added to his basis and changed the depreciation amounts. Secondly, we're treating the house as a whole and depreciating everything together instead of breaking out items that could be depreciated more quickly than the 27.5 years. This is described in detail in our cost segregation tutorial.

The remaining 24 years in these examples are nearly identical to years 2011 thru 2013, except for the last year which will have differing amounts based on the month the property was originally purchased and put up for rent.

Lastly, in example (3) did Bob lose that roughly $1000 difference in first year depreciation compared to the first two examples? No, Bob will still get it but it's tacked on to the last year, approximately 28 years from now. Few people own their rentals that long however.

EasyRentalTools helps you both manage your rental property AND prepares you for tax time! By simply entering your monthly expenses and income in an easy calendar format EasyRentalTools builds all of your tax entries in the background plus provides you with a printable journal that makes excellent backup for your tax deductions! EasyRentalTools will even track your mileage for all of those rental property related tasks – mileage that is deductible at over 50 cents per mile! Try a 10 day free trial and see for yourself! Start your free trial today!

Disclaimer -- Legal and tax information is not legal or accounting advice.

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