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Rental Property Depreciation, Simplified

Any investor who just bought their first apartment building knows that one of the greatest benefits of owning a rental property is the tax perks. Rental property owners have a long list of tax deductions, including owner and operating expenses, the pass-through deduction, and the mortgage interest deduction.

Arguably the most powerful rental property tax benefit is depreciation: the process used to deduct the costs of buying and improving a rental property. You can even include appliances and improvements, such as a new roof or kitchen. Depreciation can give you a substantial tax deduction every year for nearly three decades.

So, how does it save you money? And how does it work?

Here’s how you can use rental property depreciation to dramatically reduce your tax bill:

How Rental Property Depreciation Works

Rental property depreciation lets you deduct a portion of the property’s purchase price, plus improvement costs, every year of its “useful life,” a term to describe how long a depreciable asset can generate cost-effective revenue.

The most common system used to calculate real estate depreciation estimates that a property is “useful” for 27.5 years. A very simplified way to calculate your annual depreciation deduction is to divide the purchase price of your property, by that 27.5-year number.

However, calculating depreciation is a little more complicated than, for example, calculating real estate commission, because there are very strict requirements governing which types of rental properties can depreciate.

First, you have to be the owner of the property. In addition, you have to use the property as an income-producing asset, and it has to be expected to last for more than a year.

Finally, the property has to have a “useful life.” Meaning, it’s an asset that can “wear out” and eventually lose its value. That’s why only your property can depreciate, not the land it sits on, which never gets “used up.”

If you put your rental property into service and dispose of it (or use it for something other than business) within the same year, you can’t use the depreciation deduction. If your property meets all those requirements, you can start claiming depreciation.

If your income from that rental property is $20,000 a year, at tax time, you can apply your $10,000 depreciation and immediately reduce your tax liability by half.

How Depreciation Works in Action

Let’s say you found a great investment property and bought it for $300,000. As mentioned above, the building can depreciate but not the land. A common way to separate the two is to attribute 80% of the value to the property and 20% to the land. Subtracting 20% means you can depreciate $240,000 of the purchase price.

Then you notice the property has a leaky roof, so you have a new one installed for $20,000. You also have to replace the water heater at a cost of $15,000. You can add $35,000 in repair costs for a total of $275,000 you can deduct.

Divide that by the standard depreciation term of 27.5 years, and you get a flat $10,000 a year in depreciation. If your income from that rental property is $20,000 a year, at tax time, you can apply your $10,000 depreciation and immediately reduce your tax liability by half.

That’s the power of depreciation, and you get to claim it every year you own the property for 27.5 years — or until you sell the property or stop using it as a business asset.

Don’t Forget About Depreciation Recapture

Depreciation is an incredibly valuable tax deduction that gives owners a huge, recurring tax break. But there’s a small catch: when you sell the property, you have to give some of that money back in the form of “depreciation recapture.”

Using the example from above, let’s say you rented the property for a decade, and each year you claimed $10,000 in depreciation for a total of $100,000.

You then sold the property for $475,000. You’ll have to pay capital gains tax on your profits, and you’ll have to calculate your profits using an adjusted basis that takes what you claimed in depreciation into account.

In other words, you don’t simply subtract the depreciable amount of the purchase price ($275,000) from the sale price of $475,000 to get a profit of $200,000.

First, you subtract total depreciation claimed ($100,000) from the depreciable amount of the purchase price ($275,000) to get an adjusted basis of $175,000. Then you subtract that from the sale price to get your actual taxable gain of $300,000.

However, depreciation is taxed differently than capital gains. Long-term capital gains are taxed at a rate of 15% or 20%, while depreciation is taxed at a much higher rate of 25%. In our example, $100,000 of that $300,000 gain will be taxed at the depreciation recapture rate of 25%, while the remaining $200,000 will be taxed at the long-term capital gains rate, which is tied to income.

Claiming rental property depreciation can be complicated. It’s not as straightforward as calculating return on investment. It’s a very powerful tax strategy when used properly, but if it sounds overwhelming, consider working with a seasoned tax professional who can guide you through the process.


Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.

Getting Ready to Sell?

Good news for sellers: If you’re thinking about or planning to sell your home and wanting to maximize the return on your investment (ROI), there are key things you can do that are affordable and add a lot to your home’s overall presentation and appeal to buyers.

Most people are very visual, so by doing even the basic things you’re maximizing your home’s appeal to multiple buyers.

Broker vs. Doing it on Your Own

Working with an experienced real estate broker vs. for sale by owner (FSBO) has been proven by the National Realtors Association to net up to $60,000 more in sellers’ pockets than those who try to sell their home on their own, even after the commission is paid. And this doesn’t even factor in the time savings for sellers in terms of marketing (and that expense), listings, open houses, contract negotiations, and closing.

Declutter, Declutter, Declutter

Yes, most homes can be sold right now without having to do a thing. But remember, you will usually make a lot more from the sale of your home by decluttering.

Cleaning up landscaping and the front entrance are good places to start. Inside, removing personal items and pairing down excess furnishings and other household items, including cleaning off countertops, and removing photos are critical. Considering some fresh interior paint if there are a lot of marks and wear, all help the new buyer imagine themselves living in what you want them to see as their new home — not yours. Most people are very visual, so by doing even the basic things you’re maximizing your home’s appeal to multiple buyers.

A Picture is Worth a Thousand Words

Having high-quality photography is paramount, which now includes Matterport videos that offer a digital and thorough walk-through your home. Remember, you only have one chance to make a first impression and that usually begins online, with buyers looking and coming from all parts of the country and world. Equally important, is that you use a professional photographer and possibly a staging artist who knows how to showcase each room in its best light and make it look model-home ready.

A good real estate broker should provide you with a list of items to remove and store — both for photo sessions and showings. These include but are not limited to removing everything from the kitchen counters, hiding trash cans, storing animal food and bedding (and removing odors for showings), hiding TV controls, having beds perfectly made, and turning on all the lights.

While this is just an overview, the point to remember is less is more when it comes to personal items and even small changes yield big results — money in your pocket. Visual appeal goes a long way in attracting buyers and maximizing your ROI.

1.2 4800 Meadow Drive 21 Riverbend East Vail Bhhs Alida Zwaan
4800 Meadow Drive, Riverbend #21, East Vail: Recently remodeled, this free-standing, 3 bed/3 bath 1,595 sq. ft. townhome features vaulted ceilings with sunlit windows, open space views, and access. The great room opens into a gourmet kitchen, which looks out to a private outdoor patio. Additional owner benefits include access to the Vail Racquet Club offering an outdoor heated pool, hot tub, fitness center, and cozy restaurant. Listed by Alida Zwaan with Berkshire Hathaway HomeServices Colorado Properties, the home attracted buyers spanning cities from Denver to Mexico City, and sold over list price for $1.82M in February 2022.
2 548 S Frontage Road Westwind 104 Bhhs Alida Zwaan Copy
548 S. Frontage Road, Westwind 104, Vail: Conveniently located in the heart of Lionshead Village and steps to the Eagle-Bahn ski lift, this 2 bed/2 bath, 1,115 sq. ft. condo features remodeled bathrooms, new carpet, blinds, and kitchen appliances, as well as building updates. An interior patio area offers a lounge area and firepit, with additional amenities including an exercise room, hot tub, pool, and private ski/storage locker adjacent to the heated underground parking. Newly listed by Alida Zwaan with Berkshire Hathaway HomeServices Colorado Properties for $1,679,800.
3 132 Brooktroutloop Bhhs Thalia Leiva Copy
132 Brook Trout Loop, Dotsero: This 1,652 sq. ft., 3 bed/2 bath ranch style home offers breathtaking views including a backyard pond and wilderness playground. Newly built in 2019, owners made additional upgrades, including built-out closets, new flooring, light fixtures, baseboards, and painted kitchen cabinets, resulting in an additional $20,000 over list price for the sellers. The home was listed by Thalia Leiva of Berkshire Hathaway HomeServices Colorado Properties for $539,000 and sold for $552,000 on March 11, 2022.
4 127 Jules Drive Mtn Glen Bhhs Thalia Leiva
127 Jules Drive #F-104, Gypsum: Located in Gypsum’s Mountain Glen development, this 2 bed/2 bath, 895 sq. ft. condo features updated flooring, granite counter tops, kitchen amenities, bathroom vanities, and washing machine. The ground level unit also includes a patio, fenced-in yard, and two designated covered parking spaces. Listed by Thalia Leiva of Berkshire Hathaway HomeServices Colorado Properties for $359,000, the condo is currently under contract.

(Photos and descriptions, courtesy of: Berkshire Hathaway HomeServices Colorado Properties.)
Thalia And Alida 2
(Thalia Leiva, left, and Alida Zwaan, right)

Thalia Leiva and Alida Zwaan are Chairman’s Gold Circle Award winning broker associates for Berkshire Hathaway HomeServices Colorado Properties, putting them in the top 2% of the 50,000+ company network brokers nationwide. Fluent in Spanish, Thalia is based out of the company’s Eagle Ranch office down valley; and Alida, the Vail Lionshead office. They can be reached at [email protected] or 970-306-2016 or [email protected] or 970-471-0291.