What is the Tax Depreciation Benefit of Owning Investment Property | RPM Midwest

The IRS requires real estate investors to depreciate (for estimated wear, tear and obsolescence)

their investment properties. The depreciation deduction reduces income from the property,

ultimately reducing the investor’s tax liability.

Business or investment property (tax lives in parentheses) such as residential buildings &

improvements (27.5), land improvements (15), and personal property (5) (e.g., appliances,

computers, and vehicles) must be depreciated over their tax lives. Land is not depreciable.

Residential buildings and improvements use the straight-line method of depreciation for tax

purposes. An equal amount (1/27.5) is deducted each year until the building & improvements

have been fully depreciated. Land improvements and personal property use an accelerated

method of depreciation allowing for faster write-offs.

Example:

Purchase price of a fully renovated residential investment property = $100,000

Land value is not depreciable. Aggressive accountants might argue that land equals 10% of the property’s value, therefore 10% of the price is considered “land value” and is not depreciable. The balance is depreciable over 27.5 years. $100,000 x 90% = $90,000 / 27.5 years = $3,273 annual depreciation

If the investor is in the 35% tax bracket, the annual tax benefit is $3,273 x 35% = $1,145.

The $1,145 represents actual tax savings.

Disclaimer: Any information communicated by EquityTeam Inc. is for general information only and it should not be construed as tax, legal, or investment advice. Before making an investment decision, please consult with competent professionals. The IRS requires real estate investors to depreciate (for estimated wear, tear and obsolescence)their investment properties. The depreciation deduction reduces income from the property,ultimately reducing the investor’s tax liability. Business or investment property (tax lives in parentheses) such as residential buildings &improvements (27.5), land improvements (15), and personal property (5) (e.g., appliances,computers, and vehicles) must be depreciated over their tax lives. Land is not depreciable.

Residential buildings and improvements use the straight-line method of depreciation for taxpurposes. An equal amount (1/27.5) is deducted each year until the building & improvementshave been fully depreciated. Land improvements and personal property use an acceleratedmethod of depreciation allowing for faster write-offs. Aggressive accountants might argue thatland equals 10% of the property’s value.
Example:
Purchase price of a fully renovated residential property – $100,000
10% of the price is considered “land value” and is not depreciable. The balance is depreciableover 27.5 years.
$100,000 x 90% = $90,000 / 27.5 years = $3,273 annual depreciation
If the investor is in the 35% tax bracket, the annual tax benefit is $3,273 x 35% = $1,145. The$1,145 represents actual tax savings.
Disclaimer: Any information communicated by EquityTeam Inc. is for general information onlyand it should not be construed as tax, legal, or investment advice. Before making an investmentdecision, please consult with competent professionals.