Friday, April 20, 2018 / by Taryn Hale
One situation where deprecation can be the hero is when you have an investment property and it comes time to file taxes. Depreciation is the process through which the costs of owning an investment property are spread out over the "useful life" of the property.
Depreciation can start as soon as the property is ready for tenants. It can continue until the cost of the property has been deducted, or when the property is sold, destroyed or converted for personal use.
These things can get complicated, and we urge you to hash these numbers out with your tax professional. But here are some bullets to give you the gist of it:
- Depreciation only applies to the building, not the land. So when you are calculating depreciation, you need to subtract the land value from the purchase price.
- There are two different deprecation "systems," of which the General Depreciation System (GDS) is the most commonly used. This system uses a recovery period of 27.5 years for a residential rental property.
- Keep in mind that if you depreciate a property, and then sell it for more than it's depreciated value, then you will have to pay a depreciation recapture tax.