All About Rental Property Depreciation
The IRS allows you to write off the depreciation of your residential investment property over a 27.5 year period. This is based on the assumption that, like all other assets, it will gradually wear out and become obsolete when in reality your property is likely gaining in value. To see what this hidden benefit is worth, take 80% of your purchase price (the land is worth approximately 20% and cannot be depreciated) and divide it by 27.5. The result is a deduction that you can apply towards ordinary income every year. If you bought a small $250,000 house, for instance, you could write off $7,272.73 of your ordinary W-2 income every year. At a 25% tax rate, that’s a savings of over $1,818 in income taxes paid annually. In addition, you can write off all maintenance, management, interest, insurance, and property tax expenses. Buy three houses and get an annual $21,818 depreciation write-off to take full advantage of this benefit (the limit is $25,000)*. That’s a total of $750,000 in real estate that the government actually rewards you for buying by lowering your taxes. First rule of wealth accumulation? never turn down free money. [And don’t forget to take a home office deduction for managing your rental properties. See Internal Revenue Code 280A or talk to your tax advisor.
* If your adjusted gross income is more than $100,000 you cannot claim the entire deduction. It phases out and disappears at the $150,000 level. It is suspended, however, for future use or upon sale of the property.
