19 Feb Depreciation for Real Estate Investors: How to Reduce Your Taxes and Increase Your Profits

Introduction:

As a real estate investor, one of the most significant benefits you can take advantage of is depreciation. Depreciation is a tax deduction that allows you to deduct the cost of your investment property over time. By claiming depreciation on your residential real estate investment properties, you can significantly reduce your tax burden and increase your profits. In this post, we’ll provide an in-depth guide to depreciation for residential properties, including how to claim it on your taxes, what forms to use, and whether to do it yourself or hire a tax preparer.

How to Claim Depreciation on Your Residential Real Estate Investment Properties:

1. Understand the Tax Code: To claim depreciation on your residential real estate investment properties, you must first understand the tax code. The IRS provides specific guidelines for how to claim depreciation, including the useful life of the property and the method of depreciation.
2. Determine the Useful Life of Your Property: The useful life of your property is the length of time over which you can claim depreciation. Residential rental properties are generally considered to have a useful life of 27.5 years.
3. Choose a Depreciation Method: There are two methods of depreciation for residential rental properties – straight-line depreciation and accelerated depreciation. Straight-line depreciation is a consistent deduction each year, while accelerated depreciation provides larger deductions in the early years of ownership.
4. Complete IRS Forms: To claim depreciation on your taxes, you’ll need to complete IRS Form 4562. This form provides information on the property, the cost basis, and the depreciation method.
5. Consider Tax Preparation: While it’s possible to claim depreciation on your own using a tax preparation software like TurboTax, it may be best to hire a tax preparer who is familiar with real estate investments and the tax code. A tax preparer can ensure that you’re claiming depreciation correctly and maximizing your tax benefits.

Examples:

Let’s say you purchase a rental property for $200,000. The land value is estimated to be $50,000, and the building value is $150,000. You can claim depreciation on the building value over 27.5 years, which would be a deduction of $5,455 per year. This could result in significant tax savings over time.

Another example is if you own multiple residential rental properties. You can claim depreciation on each property, which can add up to a significant tax benefit. For example, if you own five rental properties with a total cost basis of $1 million, you could claim depreciation of $36,364 per year.

Conclusion:

Depreciation is a powerful tool for real estate investors that can significantly reduce your tax burden and increase your profits. By understanding the tax code, determining the useful life of your property, choosing a depreciation method, completing IRS forms, and considering tax preparation, you can claim depreciation on your residential real estate investment properties with confidence.