There are three simple factors by which you can determine the amount of depreciation that you can deduct every year. These factors include your basis in the property, the recovery period, and which method is used for depreciation. Earlier the rental property was depreciated using Modified Accelerated Cost Recovery System (MACRS); however, now it is always recommended to hire and ideal expert for calculating the depreciation taxes.
Further, in this article, you will know the ways to calculate property depreciation and if you want a tax depreciation schedule calculator, then you can visit capital claims or click for a tax depreciation schedule calculator.
Table of Contents
Determine On The Basis Of The Property.
Basically, the basis of the property is termed as the amount or cost you have paid to acquire the property. The amount or value can be anything, and it may be in cash, with the mortgage, or in some another manner. The basis also includes the settlement fees and closing costs which includes legal fees, surveys, recording fees, transfer taxes, title insurance, and any other charges that the owner owes if you agree to pay.
However, some settlement and closing fees do not include in the property basis such as fire insurance premium, rent for tenancy of property before closing, charges connected to get or refinance the loan, credit report costs, appraisal fees, and mortgage insurance premium.
Separate The Cost Of Land And Building
The significant point to note is that you can only claim property depreciation of the building, which does not include land. Hence, you need to determine the value and separate the cost of both land and building. If you want to determine the amount, then you can use fair market value at the time you bought the land and building.
Let’s take an example, suppose you brought a house worth $110,000, and the most recent real estate tax assessment value was $90,000, in which $81,000 was of the house and rest $9,000 was of land. Therefore, you can allocate 90% of the purchase price to the house, and rest 10% to the land.
Determine Your Basis In The House
This step is a crucial one because now you already know about how to determine the basis of the property and how to separate the cost of the property. Therefore, it is time to determine your basis in the house. From the above example, you can depreciate $99,000 or 90% basis in your house.
Determine The Adjusted Basis, If Necessary!
Be ready to make some certain changes such as increasing or decreasing to your basis sometimes, which may happen during the buying time or the time you have it ready for rental purpose.
In conclusion, if you are a property rental owner, then you must not forget to claim property depreciation taxes. If you still have any confusion about how to calculate property depreciation taxes, then you can hire an expert, or you can consult your accountant for more information.
