how do i properly file my taxes on my rental property using depreciation.what do i need to know?

Question

what is depreciation and how do i use it on my rental property?
how do i get a tax code book? what else do i need to know??

Answer 1

The truth is you need to read this:

http://www.irs.gov/pub/irs-pdf/i4562.pdf

or seek the help of a qualified professional such as an enrolled agent or CPA.

Answer 2

Rental property income is reported on Schedule E The following links will send you to a copy of the schedule and instructions.

http://www.irs.gov/pub/irs-pdf/f1040se.pdf
http://www.irs.gov/pub/irs-pdf/i1040se.pdf

The Depreciation is entered on line 20 of Schedule E. Calculating the correct depreciation is not always easy The following link will provide the IRS instructions on depreciation.

http://www.irs.gov/pub/irs-pdf/i4562.pdf

You may need a form 4562 which is found at the following link.

http://www.irs.gov/pub/irs-pdf/f4562.pdf

The best advise I could give you is not to try this on your own at least for the first year. You should seek the advise of a tax professional as determining the correct depreciation can be difficult. You normally will depreciate a residential rental property for 27.5 years but you could depreciate some of the things in the home at a different rate. If you do try this on your own you will want to buy an upgraded version of the tax program you plan to use in order to handle the depreciation.
If you master depreciation let me know how you did it because I have been doing taxes for years and I still research each and every case. Good luck.

Answer 3

The easiest way to do this is pay a pro. But you can do it yourself--easiest way is to buy some tax software (i.e. TurboTax--it's pretty cheap). Give it a shot, print out the return, & take it to H&R Block who will check it for free. If they find errors/changes they will charge you prep fees to fix them.

You got a tremendous amount of very good information in the previous answers. Basically, the house is depreciable but not the land. The general rule is that the land is worth 20% of the total cost--but this could differ depending on where the property is. Don't forget to include in the cost all the expenses of purchase (points, fees, etc.).

Don't let anyone who isn't experienced in tax prep prepare your return (even if they are a CPA or enrolled agent). If you go to a chain (i.e. H&R Block) ask for the manager or an experienced preparer.

Don't forget to check you locality/city to ensure you do not need a business license and/or have to file business taxes.

Answer 4

Depreciation is a term the IRS uses to allow you to get a tax break on the devaluation of property over time. They figure that the property will slowly be worth less and less and finally, after 27.5 years, it will be worth nothing.

All of your rental items will go on Schedule E which will flow to the first page of your 1040 under income. Rental income is passive. Most people, after figuring in all expenses and depreciation will have a tax loss on their rental property for many years. Normally, one can not take passive losses on their 1040. But, for rental property, there is an exception. If your Adjusted Gross Income (bottom line on 1st page of the 1040) is more than $150,000, then all of your losses will not be allowed that year. Instead, they will all pass onto next year. They keep being passed and passed until you can finally use them, or until you sell the property. They don't disappear. If your AGI is between $100,000 and $150,000, they phase out at the rate of $1000 for every $2000 of AGI. So, someone with an AGI of $104,000 can write off up to $25,000 - $2,000 or $23,000 of passive Real Estate losses that year. Anything above that gets carried over to next year.

So, how do you depreciate? You enter the basis of the property on a schedule. The amount of depreciation you get to take each year is 1 / 27.5 of the value of the buildings...not the land. You can NEVER depreciate land. It comes out to 0.303% per month.

Sound confusing? It is. Most people who own rental property let other people do their tax returns. Others use special tax software that walks them through the questions. Don't try it yourself using paper. If you must do it yourself, at least use the best software available. Or, some sites let you go on-line to do your taxes. www.hrblock.com is one. It will ask you if you have rental property then ask you specific questions. You have to pay for it, but it is cheaper than having a CPA or someone doing your return. Whatever is most comfortable for you. I always suggest going to a professional the 1st and maybe 2nd year to see how it is done then, if you have the courage, doing it yourself from there on out.

Hope this helps :)

Answer 5

TaxMan had good information to which I'd like to add. Real property is depreciated under the straight line method so the formula he is recommending will work, with one slight exception. Real property is calculated on the mid-month convention which means in the year of purchase and the year of disposal you will not use 1/27.5th. You will use ? minus one/half over 12 times the year number caluclation (The question mark would be filled in with the number of the month that you purchased. For example if you purchased in Decmeber you would calcualte 11.5/12 times 1/27.5th of the building value).

Also this is not the method to calculate any other property. If you have personal property (for example furnishings) that are rented with the house they are calculated under the MACRS (Modified Accelerated Cost Recovery System) method which essentailly is double-declining balance with a switch to straight line (If you have accounting knowledge these are familiar terms if not you may need to use IRS tables to help you). You will need to determine a class life and depreciate under the MACRS formula only taking a half-year in the year of purchase and the year of disposal.

One other "addition" to TaxMan's explanation: - He gave correct information for the "small landlord exception" (That's the name for the getting to take a loss of $25k per year until the phase-out between 100k and 150k AGI that he described) but if you are a "materially participating real estate professional" (definition - you spend at least half of your professional services time managing, developing, improving, leasing your real estate property and that half time accumulates to at least 750 hours per year) the real estate will not be limited by "passive loss limitations" because it is your "active" trade or business.

I hope this helps (I honestly think it probably just made it more confusing but -Hey- this IS tax law afterall).