Depreciation Research Paper

If you are the owner of a rental property, then you have to declare rent income. Because it is classified as income, it is also taxed. However, if you are strategic enough, you can use your rental expenses to reduce your taxes on the property. Aside from write offs, you have another ally in turning your rental profit into taxable loss: depreciation.

What is Depreciation?
The money you spend for your rental property is considered by the IRS as an expense, and is usually written off. When you make major improvements and renovations to a property you bought, the IRS does not really consider the amount you sent as an expense, since you still have the property and its increased value. For this kind of expenses, the IRS allows you to claim depreciation.
This process lets you write down the value of your property and the improvements you make on it over the course of its useful life.
It must be noted that depreciation is not the exact opposite of appreciation.
It does not refer to the decline in value of the property due to wear and tear, but rather allocating its cost. Depreciation is not about assessing value, so a rental property can depreciate even if it is in optimal condition.

Which Properties can be Depreciated?
The IRS lists the following criteria for your properties to be depreciated:
• You must be the owner of the property. Renters and tenants are not allowed to claim depreciation.
• The property must be income-producing. If you use the property to earn rental income, then you can claim depreciation.
• You must define a determinable “useful life” for the property. The property must eventually wear out or get used up. This is why you can depreciate a house, but not a piece of land.
• The useful life of the property lasts longer than a year. Otherwise, the expense would be written up as regular rental
expense.

When does Depreciation Start and Stop?
Deprecation deductions do not start when you buy a property; you start taking deductions when you start putting it up for rent and earning income from it. The IRS refers to this as putting the property in service. When you pull the property from the service either because you stopped renting it or you sold it to someone else, then depreciation stops. Another way for depreciation to stop is when the entire cost basis (cost of buying the property, taxes paid, settlement fees and renovations on the property) has been
deducted.

Some property owners do not want to claim depreciation because they do not want it to lose value as they plan to sell it after some time and does not want to be subject to depreciation recapture. However, this is a big mistake. In the end, you will still pay whether or not you depreciated your property. It would be wise to claim depreciation and use the amount on other investment opportuniti