Depreciation
You are required to deduct or write-off a certain percentage of the cost of the structures and/or improvements on your real property held for rental, investment or use in your business as depreciation expense each year. The depreciation deduction recognizes the decrease in the value of the property caused by wear, tear and usage. Each year a property depreciates it results in the tax basis in that property also being lowered. Typically the tax basis shifts up or down depending if capital improvements are made to the property (tax basis goes up) or annual depreciation deductions are taken (tax basis goes down).
Investment real estate is depreciable when it is placed in service; not when acquired. To qualify for depreciation deductions, your tangible real property must:
be used in your business, be income-producing, or held as investment property;
be property in which you have a capital investment;
have a determinable useful life;
have an expected life of more than twelve (12) months
Property held for personal use, such as a primary home, second home, or vacation home cannot be depreciated since it is not held for investment. Inventory held primarily for sale, including real estate investments, can not be depreciated.
Residential property is depreciated over a period of 27.5 years at a rate close to 3.6% each year while Commercial property is depreciated over 39 years at a rate close to 2.6% each year. You can depreciate most types of tangible property except land.
Depreciation Recapture
You may be required to "recapture" the depreciation deducted by you on your real estate investment property upon the disposition (sale) of the investment property. This means that you may have to recapture or add back into your taxable income the amount of depreciation taken on your investment property when you dispose of (sell) your investment property, unless you take advantage of a 1031 exchange.
Depreciation allowed or allowable, whether deducted or not, must be included in the depreciation recapture income tax computation upon the disposition (sale) of your real estate investment.
For further information on Depreciation and IRS guidelines, please click the link (CLICK HERE)