How to Read Your Rental Property Depreciation Calculator Results
- Cost basis: This is the original purchase price of the property plus all closing costs; if you’re unsure of your closing costs, they’re typically 2 to 5 percent of the purchase price
- Averages of rental property depreciation: The useful life of residential rental property is 27.5 years using the general depreciation system (GDS) of the modified accelerated cost recovery system (MACRS).
- What’s next: Using the residential rental property depreciation calculator you can determine how much depreciation expense you can deduct from your income each year based on purchase price and useful life, lowering your tax bills each year.
How the Rental Property Depreciation Calculator Works
Rental property depreciation is a process used to deduct the costs associated with purchasing and improving income-producing property. Rental property depreciation happens during the course of the property’s useful life as determined by the IRS’s depreciation method. The rental property depreciation calculator is used by investors to calculate the amount of depreciation per year as well as the total amount of depreciation during the asset’s useful life.
Our rental property depreciation calculator uses straight line depreciation because the alternative is much more complicated. Our free rental property depreciation calculator should serve as a tool to help you estimate your property depreciation amount. However, we still recommend working with a tax professional.
The real estate depreciation calculator shows you how much your depreciation is during the course of one year and the property’s useful life, according to the general MACRS depreciation method. It also displays a graph so you can see your depreciation during the course of multiple years, all the way up to 27.5 years for residential property.
Who a Rental Property Depreciation Calculator Is Right For
A rental property depreciation calculator is right for you if you own one or more residential rental property and want to calculate your expected depreciation on an annual basis or during the property’s useful life of 27.5 years. Our free rental property depreciation calculator shows the amount of depreciation, which can help you maximize your tax savings.
A rental property depreciation calculator is typically right for:
- A residential real estate investor who owns single family homes, vacation rental properties or condos
- An investor who owns multifamily property which is typically a property with two or more separate residential units
- A commercial investor who is an owner-occupant and runs their business from their own commercial property
- A commercial real estate investor who owns income-producing commercial real estate like an office building or a shopping center
- Real estate investors who want to calculate depreciation on improvements they make to the property such as replacing the roof or renovating a kitchen or bathroom
This rental property depreciation calculator can be used for more than just showing the depreciation of rental property. It can also be used to show the depreciation of improvements made to the rental property. These improvements include things like replacing all of the doors, windows or gutters on a property. The IRS has specific guidelines for what are considered improvements and what you can use as rental property deductions.
This calculator is geared towards residential rental property depreciation, but you can still use it to show the depreciation of commercial real estate for one or more years. However, using the general MACRs method, commercial property typically has a useful life of 39 years, and the calculator only shows depreciation for up to 27.5 years.
If you have further questions about what rental property depreciation is, how it’s used and what MACRS depreciation is, read our in-depth guide on residential rental property depreciation.
Rental Property Depreciation Calculator Inputs
When using our rental property depreciation calculator, you will be prompted to input your cost basis, the recovery period and the month and year the property was placed into service. Below, we’re going to go into more detail about each of these inputs. The inputs are needed so the real estate depreciation calculator can use them to calculate the amount of your depreciation.
Cost basis is the first input that the rental property depreciation calculator is going to require. Cost basis is simply the purchase price of the property plus your closing costs. The purchase price is how much you actually paid for the property, not necessarily what it was listed for or what it’s worth today. You can find this number on your HUD-1 closing statement.
Your closing costs are the extra expenses that you pay on top of the purchase price of the property. Average closing costs are 2 to 5 percent of the property’s purchase price and include things such as your lender fees, appraisal, rental property insurance, transfer taxes and more. You can also find these on your HUD-1 closing statement. However, if you’re not sure what your closing costs are, the calculator gives you a range from 2 to 5 percent from which to choose.
The next rental property calculator input is the recovery period. This is the length of time the IRS requires you to depreciate the asset. If you want to depreciate your residential rental property, then the recovery period input is 27.5 years, which the calculator has auto-filled. However, if you instead want to depreciate an improvement made to the property, then you can select your own input from one to 27.5 years.
Most large improvements such as a roof, replacing all of the windows or all of the doors on a residential rental property have a useful life of 27.5 years. This means they’re depreciated over 27.5 years just like residential rental property is. However, if you have vehicles or furniture or other items that you want to appreciate you will need to find out what their useful life is. You can find this information from IRS Publication 946 or by consulting with your tax professional.
Placed in Service
The next thing that you need to put into the calculator is the month and year the property was placed in service. This is important as it allows the rental property depreciation calculator to use this date and then go forward 27.5 years or however many years the property’s useful life is.
The term placed in service doesn’t refer to when you purchased the property. Instead, it refers to when you first rented out the property. You should be able to find this information from your files containing residential lease agreements for the property.
Rental Property Depreciation Calculator Outputs
After you put all of your inputs into the calculator, it will use them to calculate the rental property depreciation amount per year and over 27.5 years of the property’s useful life. You can then use the depreciation amount to know more about your rental property tax savings. You can also use it help you know how much of your rental property improvement costs are being offset each year.
Rental Property Depreciation Amount
The calculator’s purpose is to calculate an output which is the rental property depreciation amount. This is the amount of rental property depreciation per year to deduct from your taxable income. The rental property depreciation calculator also shows the amount of rental property depreciation during the property’s useful life. As we previously mentioned, this information is also shown in an easy-to-read graph.
Once you have the outputs from the residential rental depreciation calculator, be sure to keep track of this information for use in future tax filings. One of the best ways to keep track of this information is by using real estate account software. Check our list of the Best Real Estate Accounting Software to see which is best for you.
Pros and Cons of Using Rental Property Depreciation
There are both advantages and disadvantages of using rental property depreciation. One of the main pros of rental property depreciation is that it is a way to offset the expenses of owning and maintaining income-producing property. However, one of the cons is that MACRS depreciation can be complicated and you need to follow the IRS’s depreciation guidelines.
“Typically, if your personal tax bracket is 25 percent or above, then depreciation of rental property can be a good thing. This is because the IRS taxes any amount you depreciated over the life of your rental when you sell it. For every dollar you depreciate now, the IRS wants to tax you at a flat rate of 25 percent when you sell. This is commonly referred to as Depreciation Recapture tax.”
— Robert Taylor, Owner, The Real Estate Solutions Guy
Rental Property Depreciation Pros
Pros of rental property depreciation include:
- It’s a major tax savings because it lets you offset the costs of both your property and qualified improvements during a period of time
- It lets you offset the costs of the normal wear and tear that your property goes through
- Depreciation may produce a yearly loss which you can deduct against your rental income
Rental Property Depreciation Cons
Cons of rental property depreciation include:
- Having to essentially pay back some of the tax savings of depreciation once you sell the property through what is called depreciation recapture
- Rental property depreciation can be difficult to understand and time-consuming to calculate
- Not all types of property and improvements qualify for depreciation, so you need to know which ones do; for example, your primary residence doesn’t qualify and neither do property repairs such as fixing one or two broken windows
Tax Advantage Alternatives to Using Rental Property Depreciation
You’re not required to take rental property depreciation. However, whether you take depreciation or not, once you sell the property you will have to pay depreciation recapture on the property. This is basically a way for the IRS to recover some of the money you received in tax savings once you sell the property.
If your property or other asset doesn’t qualify for depreciation or you choose not take it, there are alternatives:
- Rental property tax deductions: The IRS allows tax deductions on all legitimate expenses related to running a rental property; these expenses can be deducted yearly, unlike depreciation; for example, you can deduct money you spent on fixing a leak or patching a roof
- 1031 exchange: A 1031 exchange helps investor defer capital gains tax by selling your investment property and rolling your capital gains (profits) over into purchasing a new like-kind property
“1031 Exchanges are a great way to delay paying tax on the profits made when selling a rental property. With a 1031 Exchange, you can ‘roll’ your profits into a new property and avoid paying tax on the sale. Be sure to contact a CPA [certified public accountant] who is knowledgeable in real estate. He or she can help you navigate the ins and outs of a 1031 as well as depreciation and deductions.”
— Kevin Ortner, CEO, Renters Warehouse
If you’re interested in doing a 1031 exchange and need a company to help you complete the exchange, check out our guide to the best 1031 exchange companies.
The Bottom Line
Residential rental property depreciation is a complex subject, and the calculations around depreciation can be confusing. Our free rental property depreciation calculator can do the calculations for you based off of the data you input. It will calculate the depreciation amount of your rental property each year and during the use life of the asset you’re depreciating.