There are several tax benefits to owning investment property, and one of those benefits is depreciation. While it can save you a lot of money at tax time, not every property owner understands how it works or when to use it.
As professional San Diego property managers, we enjoy sharing our knowledge and resources with investors like you, and today we want to talk about depreciation and why it’s such an advantage to your tax exposure and your investment income.
What is Rental Property Depreciation?Depreciation allows investment property owners to deduct the costs of buying a rental property and making improvements to that home. The IRS has set this up to prevent owners from having to take one large deduction during the year the home is purchased or renovated. Instead, you can take depreciation credits throughout the average life of the property. Currently, the IRS has determined that each rental property has a useful life of 27.5 years.
The word depreciation sounds negative. You may think it means degradation in value. That’s not true at all. Depreciation is about distributing the cost of the property, not assessing its value. You'll depreciate rental property even if it is brand new and manage to keep it in perfect condition.
San Diego Property Management: Does Your Property Qualify for Depreciation?The IRS is strict about what you can and cannot do with your rental property depreciation, and the first thing you’ll need to determine is whether you’re eligible to enjoy this tax benefit. These are the current requirements, and you must meet all of them:
- You must be the owner of the property.
- You must use the property in your business or as an income-producing activity. You cannot occupy it yourself as a residence.
- The property must be depreciable, which means it’s subject to general wear and tear. It should lose its value naturally, from decay and general use.
- The property must be expected to be used and rented out for at least a year or more.
Calculating Your Depreciation with San Diego Property ManagersYou should talk to your local property management company or your accounting professional about how to correctly depreciate your rental property at tax time. The amount you’re able to depreciate will depend on several factors, and there are different depreciation methods used by investors.
First, you’ll need to determine the basis of the property, which is the amount you paid for the home. Then, you’ll need to establish the amount that your physical property is worth; land cannot depreciate. Your most recent tax assessment or appraisal can help you with this. Finally, you’ll make needed adjustments based on any improvements you’ve made to the property.
Depreciation is an important tax tool when you’re investing in San Diego rental properties. It allows you to spread out the cost of acquiring homes over several decades, and this is good news for your annual tax exposure.
Remember that rental property laws are complicated in California, and especially when we’re talking about the federal tax code. We always recommend you surround yourself with professionals, including local San Diego property managers. If you’d like some help understanding what we’ve talked about, please contact our team at Mercer Properties.