Modified Accelerated Cost Recovery System (MACRS)
Any residential rental property placed in service after 1986 is depreciated using the Modified Accelerated Cost Recovery System (MACRS), an accounting technique that spreads costs (and depreciation deductions) over 27.5 years. This is the amount of time the IRS considers to be the “useful life” of a rental property.
How do you calculate depreciation on a residential property?
To calculate the annual amount of depreciation on a property, you divide the cost basis by the property’s useful life. In our example, let’s use our existing cost basis of $206,000 and divide by the GDS life span of 27.5 years. It works out to being able to deduct $7,490.91 per year or 3.6% of the loan amount.
What are the rules for depreciation on rental property?
There are certain rental property depreciation rules that the IRS expects you to follow. They include using the MACRS that spreads costs and depreciation deductions over 27.5 years for residential properties and 39 years for commercial properties. Keep in mind that we are using the GDS of MACRS and not the ADS.
Do you get a tax deduction for rental property?
This question applies to owners of residential rental property, including overseas property subject to the residential rental property deduction rules in subpart EL of the Income Tax Act 2007. Most residential rental properties are subject to the residential property deduction rules (also known as the ring-fencing rules).
How does depreciation recapture affect real estate investors?
Rental property depreciation recapture is the gain that the real estate investor receives from selling the investment property, and it must be reported as income to the IRS. This can hurt an investor because it’s additional income that you have to pay taxes on based on your ordinary tax rate, which can be in addition to capital gains tax.
What are the rules for residential property deductions?
Most residential rental properties are subject to the residential property deduction rules (also known as the ring-fencing rules). The rules generally limit the amount of residential deductions you can claim in the year to the total amount of residential income earned in that year.
