There are many tax saving opportunities available for landlords that rent commercial or residential property.
See also Real Estate
There are many tax saving opportunities available for landlords that rent commercial or residential property. This time of year most are focused on the year to year deductions available for qualifying expenses made for the property. While the traditional deductions provide an immediate tax savings, landlords should not lose sight of long term deductions which also offer tax savings opportunities. Through the depreciation process any new asset acquired for a property (washers, dryers, new equipment, renovations or new vehicles) that provide value beyond a year are depreciated. This process offer landlords the opportunity to realize an ongoing tax savings over many years. To help clients, prospects and other understand the tax benefit of depreciation and how it works; Hanson & Company has provided a brief summary of the process below.
Real property is defined as fixed property – principally land and buildings. However, only property that wears out, decays, gets used up, or becomes obsolete over time can be depreciated. (Land is not depreciated because there is no limit to it’s useful life.) In most cases, any structure used in rental activity can be depreciated. This can include apartment buildings, houses, duplexes, condominiums, mobile homes, swimming pools, parking lots, parking garages, tennis courts, clubhouses, and other facilities. Additionally, structures not used by tenants that you own and use for rental purposes may also be depreciated. Examples include rental offices, storage areas, garages and even parking lots.
Tangible personal property that lasts for more than one year can also be depreciated. This includes items owned by you inside your rental unit and includes stoves, refrigerators, furniture, and carpets. Other personal property that you use to conduct your rental business can also be depreciated, even it it’s not within the property itself. A few examples include your computer, fax machine, cell phone, lawn mower, or automobile used to get to and from your rental property.
How Depreciation Works
In simple terms, depreciation provides the taxpayer the opportunity to deduct a certain amount each year as the value of the asset is consumed. More technically, depreciation that examines how much an asset is worth (basis), how long the IRS says it must be depreciated (recovery period) and then gives the taxpayer the opportunity to deduct a certain percentage each year. Rental buildings are depreciated over 27.5 years, whereas recovery periods for other assets can be shorter.
Tax Reporting and Record Keeping for Depreciation
Depreciation must be reported to the IRS on Form 4562 Depreciation and Amortization. It is very important to keep accurate records for every asset depreciated. Account for the depreciation showing the following:
- A description of the asset
- When and how you purchased the property
- Date the asset was placed in service
- Its original cost
- Percentage of time the asset is used for business
- Amount of depreciation taken for the asset in prior years, if any
- The asset’s depreciable basis
- Depreciation method used
- Length of the depreciation period, and
- Amount of depreciation deducted for the year.
Depreciation is a complex accounting process, but one that can result is significant tax savings for many taxpayers. If you are a landlord and have questions about what assets can be depreciated or about your tax situation, Hanson & Company would like to help. For additional information, please contact us at (303) 388-1010, or click here for email. We look forward to speaking with you soon.