Can you take bonus depreciation on rental property? According to the Internal Revenue Service (IRS), bonus depreciation permits business taxpayers to write off a large percentage of the eligible asset’s cost in the first year that the asset was purchased. Then, the remaining cost can be deducted over multiple years, using regular depreciation until it phases out. Bonus depreciation is something very important to consider every year when it comes to rental properties. Depreciation is something that should be included in your finances, whether you own personal property or you manage a rental property.
For real estate investors, rental property depreciation is one of the biggest and most crucial deductions because it reduces taxable income but not cash flow. For several landlords, the goal is to allocate as much of the purchase price of the property as possible to the building value in order to maximize the depreciation expense since land is never depreciated. According to the IRS guidelines for residential income property, the portion allocated to the building will be depreciated over 27.5 years.
Claiming bonus depreciation allows taxpayers to deduct the entire cost of an eligible asset in the first year that the asset is put into use. This special depreciation deduction doesn’t replace regular depreciation, rather, you get it in addition to the regular depreciation. But, when it comes to rental property, can you take bonus depreciation? This article aims to answer this frequently asked question.
Related: Adjusting Entry for Depreciation
Can you take bonus depreciation on rental property?
Bonus depreciation permits business taxpayers to deduct the entire cost of an eligible asset in the first year that the asset is put into use. However, you cannot take bonus depreciation on actual rental property. When it comes to investment and rental properties, bonus depreciation does not necessarily apply. This is because for an asset to be eligible for this special depreciation deduction, its useful life must be less than 20 years. Rental properties don’t meet this criterion as they have a minimum depreciation period of 27.5 years.
Bonus depreciation cannot be used for actual rental properties because of the lifespans assigned by the IRS. You can’t claim bonus depreciation on a rental property because the maximum depreciation period for an asset to be depreciated using bonus depreciation is 20 years. Nonetheless, there are several ways you can claim extra deductions through bonus depreciation as applied to rental properties. Here are the ways landlords and investment property owners can benefit from bonus depreciation:
Even though the rental property itself cannot be taken out as a tax deduction at once, you can depreciate land improvements. Most land improvement jobs have a 15-year depreciation period, thus, you can claim bonus depreciation for these expenses. In fact, any permanent structures on the property (other than buildings) or work that is done on the actual land where the property is situated can be depreciated with bonus depreciation. Typical examples of land improvements on a rental property that is eligible for bonus depreciation include:
- Swimming Pools
- Sprinkler Systems
Personal property assets
Another way bonus depreciation can be used with a rental property is by deducting personal property assets. The depreciation period of the majority of the personal property that is used within a rental property is fewer than 10 years. This means you can use bonus depreciation on these personal property assets. This would allow you to deduct the entire cost of some personal property in a shorter period of time than ever before. Typical examples of personal property that may be eligible for bonus depreciation include:
- Automobiles (used for business purposes)
All of these personal property assets that are used within the rental property can be depreciated using bonus depreciation, though, there are some limits.
Improvements on rental property (not repairs)
In real estate, you can also take bonus depreciation on improvements, but not repairs. When determining what can and can’t be included in bonus depreciation, it is crucial to note the distinct differences between repairs and improvements. You can’t claim bonus depreciation on the repairs done on a rental property. Repairs are anything done to keep the property in habitable condition. They maintain or restore the property to its original condition. For instance, fixing a broken heater or replacing a damaged floorboard is a typical example of a repair. Repairs are not depreciable but are deductible, that is they can be deducted as a regular business expense in the year that the repairs are done.
Improvements, on the other hand, are anything that upgrades, adapts, or enhances the rental property. They change the property for the better in the long run and must be depreciated over time when they are expensed. For instance, converting a loft into another bedroom is a typical example of an improvement. If the improvement done on a rental property has a useful life of 20 years or less, it can be depreciated. This means you can take bonus depreciation on rental property improvements that have a useful life of 20 years or less.
See also: Tax liability formula and calculations
Can I take bonus depreciation on residential rental property?
No, you can’t. Bonus depreciation is not considered for residential rental property. This is because bonus depreciation can only be used on assets that have a useful life of 20 years or less, and residential properties having a useful life of 27.5 years are not eligible for full bonus depreciation. In real estate, you can only take bonus depreciation on improvements and personal property, not on a residential rental property itself.
That is, landlords may claim bonus depreciation when they purchase new personal property and place it in service for their rental activity. These personal properties may include carpeting, appliances, and blinds purchased for rental units or computers, office furniture, and other equipment used in landlord offices. They can also claim bonus depreciation for new depreciable land improvements such as driveways, swimming pools, fences, etc.
Read also: Is Accumulated Depreciation an Expense?Last Updated on November 3, 2023 by Nansel Nanzip Bongdap
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