Can someone explain Rental Property Depreciation? Having trouble how the 3.636% annual deduction works? Does this mean after 27.5 years I have essentially a “free” building on my land?
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You should talk to an accountant in your area. This may work differently depending upon your country, state or province, and tax situation. In canada doing this may mean you pay a much bigger capital gain tax on the property when you sell it in the future, as you have depreciated the asset over the years, but you are potentially going to sell it for the same price regardless. Meaning you have a bigger gain on the property than you would if you hadnt depreciated it. Gain = selling price –initial value of property – selling expenses. If you depreciated the initial value of property (ie what you originally paid for it) over time you can see the gain (in the eyes of the tax people) will be higher when you sell in the future. So you may pay more tax in the future, but use the depreciation now to offset some other gains for tax purposes. Basically depreciation is just a tool that allows you to better manage your ongoing tax situation.
Nope because it is a continuing percentage deduction which means each year it is a smaller dollar deduction, so the amount is always a net positive figure even after 1000 years.
When you buy a cleaning supplies for your rental, you can deduct it in the year purchased as they’re disposable. A dwelling has a long life. It wouldn’t make sense to deduct an entire house in year one, so you deduct it over the “life” of the house. The IRS chose to use 27.5 years for that. So you’re deducting or deprecating the value of the house over its estimated life or 27.5 years. If the house is $100k, you’ll deduct $3,636 per year using straight line deprecation. First and last year will be different. Land can’t be depreciated so you’ll need to split it out from the dwelling cost.
In 27.5 years, the house will be fully depreciated and have a net basis value of zero. If you sell at that point, you’ll pay capital gain tax on the full selling price less selling expenses. If you sell in between, you’ll reduce your cost basis in the property by depreciation taken.
Anyone in this thread saying you’ll never fully depreciate is incorrect… At least if you’re talking about the US. It’ll be zero basis in 27.5 years.
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