Investment Property Depreciation – A Brief Run-Through

Depreciation is one of the best property investment tax breaks available. It is claimed against the assessable income of anyone who bought their property for investment purposes.

To get some substantial savings in claiming depreciation, you need to arrange an inspection of your property with a qualified quantity surveyor who will provide you with a depreciation schedule.

Property depreciation

Property depreciation is used by investors to offset the decline in value of their depreciation on investment property against their taxable income.

Depreciation allows for the deductions to be distributed across the useful life of your property rather than claiming one big deduction the year you buy or improve your investment property.


Investors claim tax deductions for the decline in the value of their properties (a building plant, for instance). This includes many things inside the structure (the plant and the equipment assets such as dishwashers, ovens, floor coverings, and more).

The land itself is not depreciable or any other activities considered part of the land (planting, cleaning, landscaping).


Building wealth in real estate is one of the more reputable sections of the investment industry. Aside from the typical profits earned, real estate gives investors attractive tax benefits which can even act as tax shelter for the accumulated money.

The most impressive of these benefits available to real estate investors is the investment property depreciation. One of the most underrated benefits in real estate investing is deducting depreciation on rental property from taxable income.

Property depreciation

This is a significant tax benefit that lets rental property owners to deduct the costs associated with buying a home. Like traditional business expense, real estate investors are able to deduct to cost of purchasing a home.

In the U.S., the I.R.S. (Internal Revenue System) has accounted for the deterioration of homes much like they would common office supplies. The government acknowledge that the buy and hold investors depend on their homes to produce income.

Asset deterioration

It has come up with a way to compensate them for the deterioration of their assets. Homes, however, are much more expensive than traditional office supplies, the reason that the entire cost of the property is not deducted in a single year.

The investment property depreciation takes place over a pre-determined useful life of a single family home, which is pegged at 27.5 years. This results in having homeowners writing off portion of the home’s acquisition cost for nearly three decades.

Depreciation loss

The majority of single-family homes, however, lasts more than the pegged 27.5 years. It is common that the IRS allows homeowners to write off a portion of the acquisition costs every year.

However, it is not uncommon for many homes to stay in use far longer than that. This is where the biggest depreciation tax benefit comes into play: the depreciation loss.

Any deductions made on the property over the allotted 27.5 years are most likely made in the face of rising prices. Homes are more likely to appreciated in value than depreciate. This loss does not happen at all. Homeowners are then able to take advantage of deductions without their asset depreciating in value.

Depreciable asset

Not every property qualifies as a depreciable asset. For a home to qualify, it needs to meet the following requirements.

The property must be owned by the taxpayer looking to deduct depreciation. The property must be used in a business or income generating productivity.

The property must have a determinable useful life. And finally, the determinable life of the property must exceed one year.

One important note is that even if the criteria are met, the property may still not b depreciable if it is places in service and removed from service in the same year. (To ensure your home qualifies, see a tax professional.)

Rental property depreciation

When calculating rental property depreciation, homeowners must first determine the basis of the property. They must identify the acquisition cost. (This might include the settlement tax, closing costs and additional out-of-pocket expenditures.

Check with a certified tax professional to make sure you determine the correct basis of your own property. (Not every cost can be added to the basis.)

Once you have the bases, proceed to deduct the cost of the land (land is not depreciable as far as the I.R.S. is concerned.) The result should account for the cost of the home, and not the land it is sitting on.

Real estate investment depreciation

By this time, you must determine which modified accelerated cost recovery system (MACRS) that you will use to calculate real investment depreciation.

There are two systems homeowners can use: the General Depr4eciation System (GDS) and the Alternative Depreciation System (ADS). The most common is the GDS, although you can check with a tax professional what is best for your case.

The system you choose will determine the amount of time you are allowed to depreciate the home.


Those using the GDS can depreciate every year for 27.5 years. The ADS method, on the other hand, allows owners to depreciate a portion of their basis for 40 years.

After you have the basis of the property (the value of the home minus the value of the land), simply divide it by the amount of years you are able to depreciate the home.


This tax benefit of buy and hold real estate investments are significant because it has the potential of being a tax shelter, and invariably save entrepreneurs thousands of dollars at tax time.

In a sense, depreciation is a valuable method of reducing your tax obligation each year so that the purchase cost of your investment property can be spread out over decades.

However, you need to be aware that if you sell your property for more than the depreciated value, you will need to pay depreciation recapture tax for the gain.

Important notes

For the homeowner, the depreciation investment property rules are complex. It is always best, as it should be, handled by a tax professional.

Claiming depreciation on property can amount to thousands of dollars in tax savings for qualified homeowners. This is the reason why the home depreciation tax deduction should not be taken for granted when discussing the benefits of real estate investing.

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