Rental Property Depreciation Can Provide Tax Shelter

Rental property depreciation can be a benefit of owning real estate for income purposes. Many people do not take this into consideration when they are thinking about getting into rental investments. Here are the basics of rental property depreciation and how it can be beneficial.

Rental Property Depreciation

When you are in business, you get to deduct expenses from your taxable income at the end of the year. Everyone knows that you can deduct expenses that you actually pay for out of your pocket. However, with rental property depreciation, you can actually deduct something that you do not physically pay for. The value of your rental property can depreciate over time. The IRS recognizes this and allows you to take a certain amount of depreciation for this asset on your taxes. It is important to realize, though, that this deduction does not apply to every piece of real estate. If you are talking about a residential property that you live in, the IRS does not allow any deduction for this type of property. Only residential property that is used for commercial purposes such as renting can be counted in taking a deduction for depreciation. You can also depreciate commercial property that you own.

How It Works

If you are planning on getting into a rental property investment, you want to make sure that you understand how the rental property depreciation process works. As of 2010, the IRS allows you to take a deduction over 27.5 years for residential property. If you own commercial property, you can take the deduction over 39 years.

In order to calculate how much you are going to be able to deduct, divide 1 by 27.5. This will give you the percentage that you can deduct every year. That comes out to 3.636 percent. You will then take this value and multiply it by the value of the property. 

When you multiply the values together, it is important that you use only the value of the structure itself. You cannot include any of the value of the land. Land cannot be depreciated, so you will have to separate the value of the land from the value of the property as a whole.

Typically, you should be able to obtain this information from the assessor. The IRS will typically defer to the county assessor on this matter. Therefore, if the assessor says that 15 percent of the value of the property is attributed to the land, you need to subtract 15 percent from the value before doing this calculation.


When you calculate this amount, you will be able to use this as a deduction on your taxes. When you calculate your income for the year, this number will be subtracted from that amount in order to give you your adjusted gross income. This will essentially lower the amount of taxes that you have to pay for the year.

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