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CPA explains Residential Rental Property Depreciation | IRS Schedule E and Form 8825

residential rental property CPA explains depreciation

Most tax software handles residential rental property depreciation. But if you get uncomfortable preparing Schedule E or Form 8825, consider calling us at (910) 399-2705.

I’m a rental property CPA because some of my extended family owns residential rental property, so I stay on top of Schedule E and Form 8825 issues. We’ve got a virtual office to offer you service wherever you live.

What is Residential Property Depreciation?

Depreciation means you deduct the cost of your rental property over time on Schedule E or Form 8825. You can’t write it all off in the year of purchase. For the rental unit itself, the time frame is 27.5 years. But be aware that the residential rental property depreciation doesn’t include the land. Here’s an example:

  • On July 1st, 2013 you buy a residential rental property for $200,000.
  • The land is worth $50,000. It’s best to have some basis for what the land is worth. Depreciating the land would be trouble if you’re ever audited.
  • So, the house itself is worth $150,000 (200,000 – 50,000).
  • Depreciation is $5,456 per year (150,000 / 27.5).
  • You can deduct $2,727 (5,456 / 2) of rental property depreciation on your 2013 Schedule E or Form 8825.

Your Residential Rental Property usually has multiple assets being depreciated

Let’s say you buy a new stove for the rental above on October 1st, 2013 for $300. The IRS allows you to write the $300 over five years. So you’d deduct $15 of depreciation for the stove on your 2013 Schedule E or Form 8825. ($300 / 5 = $60 per year x ¼ year = $15).

Residential Rental Property can come back to bite you

The IRS makes you recapture the depreciation when you sell the rental property.

  • You sell the above rental property for $190,000 on July 1st, 2015, including the stove.
  • It looks like you lost $10,000 (200,000 – 190,000).
  • But you have to recapture the depreciation.
  • That’s $10,909 for the rental property house. ($5,456 x 2 years).
  • And $105 of depreciation for the stove.
  • You have a $1,104 gain for the sale of your residential rental property (200,000 – $190,000 +11,104 = $1,104).

Self-preparing Form Schedule E or Form 8825?

Most tax software handles simple to moderate residential rental property tax issues well. Don’t have the national chains prepare Schedule E or Form 8825 – do it yourself with tax software or give us a call at (910) 399-2705.

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