IRS Publication 527 — Residential Rental Property

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Depreciation of Rental Property You recover the cost of income -producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.

Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You can’t simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense.

You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. You may have to use Form 4562 to figure and report your depreciation. See Which Forms T o Use in chapter 3. Also, see Pub. 946.

Section 179 deduction. The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. It is separate from your depreciation deduction. See chapter 2 of Pub. 946 for more information about claiming this deduction.

Alternative minimum tax (AMT). If you use accelerated depreciation, you may be subject to the AMT . Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). The prescribed depreciation methods for rental real estate aren’t accelerated, so the depreciation deduction isn’t adjusted for the AMT . However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall -to-wall carpeting).

T o find out if you are subject to the AMT , see the Instructions for Form 6251. The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. What Rental Property Can Be Depreciated?

You can depreciate your property if it meets all the following requirements.

• You own the property.

• You use the property in your business or income-producing activity (such as rental property).

• The property has a determinable useful life.

• The property is expected to last more than 1 year. Property you own. T o claim depreciation, you must usually be the owner of the property. You are considered to be the owner of the property even if it’s subject to a debt. Rented property. Generally, if you pay rent for property, you can’t depreciate that property. Usually, only the owner can depreciate it. However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS.

Cooperative apartments. If you are a tenant -stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can depreciate your stock in the corporation. See chapter 4.

Property having a determinable useful life. T o be depreciable, your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.

Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio