As a Real Estate Tax Strategist, I review thousands of tax returns every year. Throughout my career, I’ve detected a common area for mistakes: depreciation.
Depreciation is a fundamental tool for real estate investors. Improperly reporting it on your tax sheets could lead to paying thousands of dollars extra in taxes. That’s why in this article, I’m providing five critical items you must review on your depreciation schedules to ensure you’re getting the most out of your properties.
Reporting Depreciation
First, if you have any income generated by a long-term rental property owned by you or by a single-member LLC, you must report it on Schedule E of Form 1040.
All ordinary and necessary expenses related to your property, including depreciation, can be deducted.
But what is depreciation, anyway?
In short, depreciation represents a rental property’s declining value over time. We know that real estate tends to appreciate, but depreciation still applies and actually helps us pay less on our taxes. There are several depreciation methods, but it’s important to abide by what the IRS allows. The IRS prescribes a long set of rules and regulations on depreciating assets, including a standard useful life of 27.5 years for most residential rental properties.
Like I said, depreciation is great because it offsets some of the costs you incur throughout the year and lowers your tax basis. That’s why reviewing these next five topics are so important!
Before we get started, here’s a visual of what a depreciation schedule looks like:
Five Items To Review On Your Depreciation Schedule
1. Review All Listed Totals
It seems obvious, but the first thing you must do is check the property’s total depreciable value. For the most part, you’re just making sure the total is less than the purchase price. Keep in mind that some costs such as inspections, due diligence fees, and more will be included in your depreciable basis but the total should never equal or amount to…