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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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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