Depreciation Made Simple for First-Time Rental Owners 

A customer asked me to send a simple explanation of depreciation for a rental purchase. Here is what I sent.

One of the biggest “hidden benefits” in buying a rental property is  depreciation. Depreciation is a tax deduction the IRS allows rental property owners to take each year to account for normal wear and tear on the home. Even if your property is going up in value, the IRS still lets you deduct depreciation every year. It’s a paper deduction  not money coming out of your pocket.

Let’s say you buy a typical single-family rental for $450,000.

You can depreciate the house but not the land. The purchase price has to be split into : Land value and Building (house) value A common rule of thumb in our area is: 20% land and 80% building

• Purchase price: $450,000
  Estimated land value (20%): $90,000
  Estimated building value (80%): $360,000

Residential rental property is depreciated over 27.5 years. 

$360,000 ÷ 27.5 = about $13,000 per year. which means You may be able to deduct around $13,000 every year against your rental income even though you didn’t actually spend $13,000 that year.If you place the home into service mid-year, the first year is prorated, but after that it’s fairly consistent.

Depreciation can: Reduce taxable rental income, Offset cash flow, and Improve the overall return on your investment.