Investing in rental property in Atlanta, GA, offers several financial advantages, one of the most significant being property depreciation. This tax benefit allows you to recover the costs associated with normal wear and tear over time, reducing your taxable income. Understanding how to calculate rental property depreciation can help you maximize your tax savings and improve your overall investment returns.
Understanding Rental Property Depreciation
Depreciation is the process of deducting the cost basis of a rental property over its useful life, as defined by the IRS. For residential rental property, the IRS assigns a recovery period of 27.5 years under the general depreciation system (GDS). This means that each year, you can deduct a portion of the purchase price of your rental home, excluding the land value. Real estate depreciation is an essential tax benefit that helps you reduce your taxable income and increase rental income.
Steps to Calculate Rental Property Depreciation
1. Determine the Basis of the Property
The cost basis includes the purchase price, closing costs, and any capital improvements made before the property was placed in service. However, land does not depreciate, so its value must be subtracted from the total cost.
2. Establish the Depreciable Amount
Once you subtract the land value from the total basis, the remaining amount is the depreciable basis. This is the amount that can be deducted over time as a depreciation expense.
3. Apply the Depreciation Method
As a real estate investor, the IRS requires you to use either the accelerated cost recovery system (ACRS) or the general depreciation system (GDS) for rental properties. Most rental property owners use the GDS, which spreads depreciation evenly over 27.5 years.
4. Calculate the Annual Depreciation Deduction
To calculate depreciation, divide the depreciable basis by 27.5 years. For example, if your depreciable basis is $275,000, your annual property depreciation deduction would be $10,000. These depreciation deductions reduce your taxable rental income, improving cash flow.
Special Considerations
If your property is placed in service mid-year, the IRS requires you to prorate the first year’s deduction.
You may opt for the alternative depreciation system (ADS), which extends the recovery period to 40 years.
Selling a depreciated residential property may trigger capital gains tax through depreciation recapture tax.
Benefits of Depreciating Your Rental Property
Taking advantage of property depreciation reduces rental income subject to taxes, increasing cash flow. The savings from depreciation deductions can help cover rental expenses, maintenance costs, and other property-related expenditures. Tax deductions from depreciation can also offset other costs associated with owning rental property, further improving long-term profits.
Let Legacy Property Management Handle Your Property
Understanding how to depreciate rental property correctly is crucial for maximizing tax benefits. Legacy Property Management provides expert real estate management services in Atlanta, GA if you need guidance. Our team helps property owners like you to manage tax deductions, optimize rental property investments, and ensure compliance with IRS regulations. Whether you're looking to calculate rental property depreciation or need assistance with depreciation recapture, our expertise ensures that your rental property remains a profitable investment.
Let us help you manage your residential rental property efficiently. Contact us today to learn how you can benefit from strategic tax planning for your investment property.