What Are The Requirements For Depreciation of Rental Property

What Type of Property May You Depreciate?

Depreciation of rental property deductions may be claimed only for property used in your business or other income producing activity. If the primary purpose of the property is to produce income but it fails to yield any income, the property may still 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.

The IRS rules are specific; to use depreciation of rental property, the property must meet all the following requirements:

Property You Own
To claim depreciation, you must be the owner of the property. You are considered as owning property even if it is subject to a debt.

Depreciation of Rental Property Example 1: You made a down payment to purchase rental property and assumed the previous owner’s mortgage. You own the property and you can depreciate it.

Depreciation of Rental Property Example 2: You bought a new van that you will use only for your courier business. You will be making payments on the van over the next 5 years. You own the van and you can depreciate it.

Property Used in Your Business or Income-Producing Activity
To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable. You cannot depreciate property that you use solely for personal activities.

Partial business or investment use.
If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use.

Example: You cannot deduct depreciation on a car used for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities.

Office in the home. If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Visit our “Home Office Depreciation” section to learn more.

Inventory. You cannot depreciate inventory because it is not held for use in your business. Inventory is any property you hold primarily for sale to customers in the
ordinary course of your business.

Property Having a Determinable Useful Life
To be depreciable, your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.

Property Lasting More Than One Year
To be depreciable, property must have a useful life that extends substantially beyond the year you placed it in service.

Example: You maintain a library for use in your profession. You can depreciate it. However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Instead, you deduct their cost as a business expense.

Ensure Proper Depreciation of Rental Property
You must identify several items to ensure proper depreciation of rental property including:

  • The depreciation method for the property
  • The class life of the asset
  • Whether the property is “Listed Property”
  • Whether you, the taxpayer, elects to expense any portion of the asset
  • Whether you, the taxpayer, qualifies for any “bonus” first year depreciation
  • The depreciable basis of the property
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