Depreciation of Investment Property to Reduce Taxable Income

Depreciation of Investment Property to Reduce Taxable Income

One of the benefits of being a landlord when tax time rolls around is the ability to depreciate your investment property in order to reduce your taxable income. Not only are landlords able to depreciate the building itself, but they can also depreciate any capital expenditures for items like appliances, roofs, windows, maintenance equipment, air conditioners, furnaces and even legal fees. Just about everything except the land your building is located on as well as regular repairs or maintenance — which should be deducted as expense items — can be depreciated.

Depreciation Requirements

According to the IRS, property must meet the following requirements to be depreciable:

• You must own the property.
• The property must be used to produce income or in a business.
• The property must have a determinable useful life.
• The property must last for more than one year.

If you own a commercial property, the depreciation period is 39 years. If you own a residential property, the depreciation period is 27.5 years. Depreciation for equipment or appliances is shorter because of their expected life spans — typically five to seven years. Longer-lasting equipment like furnaces may carry a depreciation schedule similar to the building’s schedule.

How Depreciation Works

Figuring depreciation is fairly simple: you estimate the worth of your investment property for tax purposes (this is known as “basis”) and divide that by the number of years in the depreciation period to arrive at your annual deduction. For example, if you purchased a commercial building for $3 million, you would divide that by 37 years, so your annual deduction would be $81,081. This is known as regular depreciation.

Bonus depreciation allows for the deduction of a specified percentage of the property cost in the first year, which was 50% for 2014. However, bonus depreciation expired on December 31, 2014, and unless Congress extends it again, it will not be available for 2015 returns.

The attorneys at Jurado & Farshchian, P.L. combine their knowledge and experience in the South Florida real estate market with a commitment to personalized, detail-oriented legal services.  Contact one of our experienced Florida attorneys at (305) 921-0440, or email us at info@jflawfirm.com.

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