Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of a certain property or piece of equipment you bought. This is intended to take into account the useful life of the item that is being depreciated. Depreciation assumes that every item has a useful life and will, over time, wear out to the point that it becomes useless. This can be from wear and tear, age, deterioration, or becoming obsolete.
Most types of property can be depreciated. The one big exception here is land. Land, in general, does not deteriorate or become obsolete. Therefore, in theory, it maintains its value over time and cannot be expensed. Another reason the tax code doesn't allow depreciation on land is that it will always have a resale value. If you sell the land for less than what you paid, you would simply have a capital loss. Improved property, such as buildings, can be depreciable, provided you separate the value of the land and its improvements.
Property that can be depreciated must meet a certain criteria. First, it has to be property in which you own. Second, it must be used for business or any other income producing activity. Third, it needs to have a useful life. As stated earlier, it must be something that will wear out, deteriorate, or become obsolete. Do buildings and rental properties meet this criteria even if they rise in value over very long periods and are still usable? Absolutely. Real estate improvements will always deteriorate and wear out over very long periods of time.
Residential property will provide depreciation deductions for 27 1/2 years. Should you keep this asset for a very long period, you will get these income tax deductions during this timeframe and continue to have a useful property remaining once the depreciation deduction interval was over, if you did a superb job at preserving your property.
There are plenty of occurrences where people obtain a positive income from the investment. In addition, they are spending money on expenditures for mortgages, routine maintenance, property management expenses, and real estate taxes. Depreciation, which is a non-cash expense, can frequently cause a loss that's only on paper. This is where they are indicating a net loss for tax purposes, however, in actuality, they're earning profits.
Most types of property can be depreciated. The one big exception here is land. Land, in general, does not deteriorate or become obsolete. Therefore, in theory, it maintains its value over time and cannot be expensed. Another reason the tax code doesn't allow depreciation on land is that it will always have a resale value. If you sell the land for less than what you paid, you would simply have a capital loss. Improved property, such as buildings, can be depreciable, provided you separate the value of the land and its improvements.
Property that can be depreciated must meet a certain criteria. First, it has to be property in which you own. Second, it must be used for business or any other income producing activity. Third, it needs to have a useful life. As stated earlier, it must be something that will wear out, deteriorate, or become obsolete. Do buildings and rental properties meet this criteria even if they rise in value over very long periods and are still usable? Absolutely. Real estate improvements will always deteriorate and wear out over very long periods of time.
Residential property will provide depreciation deductions for 27 1/2 years. Should you keep this asset for a very long period, you will get these income tax deductions during this timeframe and continue to have a useful property remaining once the depreciation deduction interval was over, if you did a superb job at preserving your property.
There are plenty of occurrences where people obtain a positive income from the investment. In addition, they are spending money on expenditures for mortgages, routine maintenance, property management expenses, and real estate taxes. Depreciation, which is a non-cash expense, can frequently cause a loss that's only on paper. This is where they are indicating a net loss for tax purposes, however, in actuality, they're earning profits.
About the Author:
Eileen Jacobs is an tax preparer in Las Vegas with over 30 years of income tax and accounting experience. | Taxes Las Vegas
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