Property depreciation, according to the IRS is the income tax deduction that makes an allowance for you as the tax payer, to recover cost over time on usage of the property. Over time the money value of a structure, in this case a home, depreciates, meaning it slowly reduces. Property depreciation is an accounting term that calculates just how much value is lost on the building. The main reason for a property owner to do this is because taxes, like income tax and property tax, are paid on the original value of the house and since the structure is slowly losing value over time, there is really no point in paying the same amount in taxes through the years.
Property depreciation conditions
The IRS allows for yearly depreciation on rental properties which can be shown as the cost of income. These deductions can be filed as part of the tax returns. The calculation on this deduction is based on three important factors:
- You should own the property
- The property has to be used as a source of income
- Useful life of the structure has to determinable
- Property should last over one year as a minimum
- If the property is large enough to house you as well, the property depreciation will apply only to the parts rented out.
Property depreciation will not include just about any expenses that you, as the owner of the property face in the rental house. So these costs mentioned will not cover mortgage payments, furniture, fixtures or appliances. There are a lot of other regulations on what can be considered property depreciation, for example, an empty piece of land cannot be categorized under this clause. For rental property, the straight line method of calculation- depreciating a certain small fixed percentage every year, is allowed.