Explaining depreciationDepreciation is the process by which you would deduct the cost of buying or improving rental property. Depreciation spreads those costs across the useful life of the property.
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Say you buy a building to use as a rental. Rather than take a single, large tax deduction in the year you bought the property, you would take a portion of the cost of the building as a smaller depreciation deduction each year.
A note about depreciation: You may have heard people use the word “depreciation” to describe the decline in value that occurs as a piece of property endures wear and tear. This isn’t really true. Depreciation is about allocating the cost of property, not assessing its value. You’ll depreciate rental property even if it remains in tip-top shape.
Depreciable propertyTo take a deduction for depreciation on a rental property, the property must meet specific criteria. According to the IRS:
You must own the property, not be renting or borrowing it from someone elseYou must use the property to produce income—in this case, by renting itYou must be able to determine a “useful life” for the property. This means that the property must be one that would eventually wear out or get “used up.” A house has a definable useful life; a piece of land does not.The property’s useful life is longer than one year. If the property would get used up or worn out in a year, you would typically deduct the entire cost as a regular rental expense.Our TurboTax Live experts look out for you. Expert help your way: get help as you go, or hand your taxes off. You can talk live to tax experts online for unlimited answers and advice OR, have a dedicated tax expert do your taxes for you, so you can be confident in your tax return. Enjoy up to an additional $20 off when you get started with TurboTax Live.
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Depreciating improvementsYou don’t just depreciate the cost of buying rental property. Money spent to improve the property is depreciated as well. An improvement is anything that enhances the value or usefulness of a property, restores it to new or like-new condition, or adapts it to a new use.
The list of potential improvements is endless, but common improvements include:
Building new additions or garagesInstalling new systems, such as heating or air conditioningReplacing the roofAdding wall-to-wall carpetingInstalling accessibility upgrades, such as a wheelchair rampRoutine repairs and maintenance are not considered improvements. Maintenance costs are deducted as expenses in the year you spend the money. For example, adding tar to a roof would be considered maintenance, while the replacement of an entire roof would be depreciated.
How long it lastsYou start taking depreciation deductions not when you buy it but when you begin using the property to generate rental income. The IRS refers to this as putting the property “in service.”
Depreciation continues until one of two things happens:
You have deducted your entire “cost basis” in the property. In most cases, your cost basis is what it cost you to acquire the property, including certain taxes and fees paid at settlement, plus any improvements to the property.You remove the property from service—meaning, you stop using it to generate income. This may be because you sold the property or just decided to stop renting it.TurboTax will search over 350 deductions to get your maximum refund, guaranteed. If you’re a homeowner, TurboTax Deluxe gives you step-by-step guidance to help turn your biggest investment into your biggest tax break.