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Property Depreciation
Property depreciation is a deductible periodic accounting charge that represents the recovery of capital investment over the useful life of property used in a trade or business or other income producing activity. Land is not included, as it does not depreciate. For depreciable properties acquired prior to January 1, 1981, the principal methods for computing property depreciation are straight-line, declining balance and sum-of-the-years’ digits.
For depreciable properties acquired on and after January 1, 1981 and before August 1, 1986, property depreciation is computed under a method called accelerated cost recovery system (ACRS), permitting cost recovery over much shorter periods.
The Modified Accelerated Cost Recovery System (MACRS) must be used to depreciate property placed into service after 1986. Taxpayers need to consult their tax advisors for more information on any changes in the property depreciation schedules that have been effected since 1986.
Property depreciation for tax purposes is different from property depreciation for appraisal purposes. In appraisal practice, property depreciation is loss in value due to any cause, including functional obsolescence or physical deterioration. For income tax purposes, property depreciation is an annual deduction from taxable income in recognition of the fact an asset may become economically obsolete or wear out physically and the owner has the right to recover his investment.
Improvements to real property are depreciable for income tax purposes if they are used in business or held for the production of income and have a determinable life longer than one year. Even if a taxpayer does not take a deduction for property depreciation, the basis of the property is reduced by the amount of the property depreciation. Upon sale, the government charges the taxpayer with the full amount of property depreciation the taxpayer could have taken.
For more information about property depreciation check out rental property tax deductions.
This is a blog post for Real Estate Professionals, Investors, Landlord, Property Manager, and Property Management Companies. Property Depreciation is brought to you by SimplifyEm Pay Rent Online and Property Management SoftwareYou might also want to read:
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