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What is Rental Property Depreciation and Why it is Vital to You PDF Print E-mail
Written by Teo Zhenjie   

150,000 – 50,000/30 = 3,333.33

Of course, it's important to note that the land value may change according to market conditions. Therefore, you will need to calculate rental property depreciation independently each tax cycle.

The above formula applies to non-residential rental properties, like hotels, motels, and business rentals.

How to Calculate Depreciation for Your Residential Rental Properties

If you own residential rental buildings or rent out your home, then you need to calculate rental property depreciation using the same formula, but the useful life span of the building is assumed to be 27.5 years. This calculation should be used for any home or residential rental building earning 80% or more of its revenue from rental income.

For the first year that you own a rental property, depreciation should be calculated using a pro-rated formula, depending on the month in which you purchased your property. Pro-rated depreciation is calculated as follows:

Annual Depreciation = Purchase Price – Land Value X Depreciation Percentage

Use the following table to calculate residential depreciation:

January 3.485%
February 3.182%
March 2.879%
April 2.576%
May 2.273%
June 1.970%
July 1.667%
August 1.364%
September 1.061%
October 0.758%
November 0.455%
December 0.152%

For example, for a residential property purchased in November for $150,000 with a land value of $50,000, depreciation for the first year is as follows:

(150,000 – 50,000) X 0.00455 = 455

How Rental Property Depreciation Affects Your Real Estate Taxes

In the short term, depreciation can be counted on your annual tax return as a rental expense, resulting in a deduction from taxes owed. If you did not know that this option was available and thus did not claim this deduction in years past, you should know that you can claim up to 3 years prior depreciation on one return.

When you sell your rental property, you should also be aware that having claimed rental property depreciation on your tax return will result in higher capital gains taxes. In addition to being taxed on any profit from the sale of your property, you'll also have to pay 1/4 of the amount that you have claimed in deductions for depreciation of the property.

Overall, you still benefit monetarily from claiming the deduction, however you may want to set aside some of the offset for the future in case you should decide to sell your rental property.  Teo Zhenjie
 

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