Depreciation of Real Estate Investments and Home
Office related items can be an effective tax shelter

Take advantage of depreciation as well as special allowances
that allow larger depreciation deductions.  Depreciate your
rental property, office furniture, computer as well as the
software you use for your home business!

You recover the cost of income producing property through tax
deductions.  You do this by depreciating the property.   The
definition of depreciation is the "annual income tax deduction allowed
to recover the cost or the basis of business or investment property
having a useful life substantially beyond the tax year".  Depreciation
allows you to recover the cost or the basis of certain property over
the time you use the property.

Depreciation is essentially an allowance for the wear and tear, deterioration, or
obsolescence of the property in question.  Even if the property fails to yield any
income, the property may still be depreciated.

Depreciation may NOT be claimed on property held for personal purposes
such as your personal residence, boat, or personal vehicle.  Depreciation
deductions may be claimed only for property used in your business or other
income producing activity.  If the property, such as your car for example, is used
for both business and pleasure, only the business portion may be depreciated.

When you own business property or equipment that gets worn down through
use, you can deduct a certain amount for depreciation, representing the wear
and tear for the tax year. 

Depreciation is commonly known as a "phantom" expense  because it is a
deduction that you don't actually pay for.   The kind of property that can be
depreciated on your tax return include machinery, equipment, buildings,
vehicles, and furniture.
 

Land Is Not Depreciable
The heading says it all; you cannot depreciate land.  As a rule, you can only
"convert" the cost of land when you eventually sell it, at which point you will
subtract the cost from the sales price to determine your taxable gain.  So,
when you purchase a rental property and the land on which the property is
situated, the cost of the land must be subtracted from the total cost of the
property.  Only then can you determine depreciation expense for the property
itself. 

Although land is not depreciable, the cost of landscaping business property
may be depreciated if the landscaping is so closely associated with a building
that it would have to be destroyed if the building were replaced.  Qualifying trees
and bushes are depreciable over 15 years.

CRITICAL FACTS TO UNDERSTAND
Three basic factors determine how much depreciation you can
deduct.  It's critical that you understand these before reading
the examples in the "General Depreciation Deductions" section.

First Year Allowances
The general rule for depreciation is that a business can't write off
the whole cost of certain assets in one year.  There are exceptions
though:

General Depreciation Deductions

Recapture Depreciation
When you dispose of property that you depreciated using MACRS,
any gain on the disposition generally is recaptured (included as
income) as ordinary income up to the amount of the depreciation
previously allowed or allowable.  This includes any Section 179
deduction claimed on the property and any special depreciation
allowance for Liberty Zone property.

To learn more about Depreciation Recapture, click here.


When Does Depreciation Begin and End?
You begin to depreciate your property when you place it in service
for use for the production of income.  You stop depreciating property
either when you have fully recovered your cost or other basis or when
you retire it from service, whichever happens first.


Depreciation Final Thought
Depreciation is a wonderful tax shelter for the small investor.  The
money you save today with the tax shelter can be invested to bring
you to your financial goal much sooner.  When in doubt, consult your
accountant to discuss if you can use the tax benefit of depreciation.


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