Taxes for landlords, part 3 - Depreciation and Amortization

In this video, I take a very oversimplified view of depreciation, focussing on the depreciation of buildings and of assets such as appliances.
2023 UPDATE:
Bonus depreciation has decreased to 80% of the depreciable basis of the asset effective 2023. The remaining basis is depreciated using MACRS percentages.
To learn more about MACRS, click here: • Depreciation 101: Wha...
Other videos on rental property:
Rental Income: • Taxes for Landlords, P...
Rental expenses: • Taxes for Landlords, p...
Schedule E: • Taxes for Landlords 4:...
Rental Loss Limitations: • Taxes For Landlords: R...
Selling Rental Property: • Taxes for Landlords, p...
Additional information and resources:
Investopedia "Bonus Depreciation": www.investoped...
IRS Publication 946 "How to Depreciate Property": www.irs.gov/pu...
IRS Form 4562 "Depreciation and Amortization": www.irs.gov/pu...
IRS Publication 527: "Residential Rental Property": www.irs.gov/pu...
IRS Schedule E: "Supplemental Income and Loss": www.irs.gov/pu...
If you want to know the every day basics of how to be a landlord, web articles aren't going to help much. However, there are dozens of books on the subject available at Amazon.com, your local bookstore, or your local library.
The book I've used is: The Weekend Landlord, by Joseph A. Landon, 2006. It was in its 2nd edition when I bought it, but it may've been updated since then. It is still available through Amazon, if you're interested.
The Tax Geek on Twitter: @taxgeekusa
The Tax Geek on Reddit: www.reddit.com/r/askataxgeek
Image Attribution:
Wikimedia Commons C.C. - S.A. (3.0 - 4.0)
Nat Geo Lover
Loenhard Lenz
Bill Family Collection
Intro Music: "Bluesy Vibes" - Doug Maxwell - KZbin Audio Library
Background and Outro Music: George Street Shuffle, Kevin McLeod, incompetech.com via KZbin Audio Library
DISCLAIMER: This video is for educational and informational purposes only. It is not intended to render tax advice or investment advice for individual situations. If you have questions regarding your particular situation, please consult with a qualified tax or investment professional.
The tax information in this video is based on tax law and IRS regulations in place when this video was published, and is subject to the whims of Congress.

[@TheTaxGeek]

2023 UPDATE: Bonus depreciation has decreased to 80% of the depreciable basis of the asset effective 2023. The remaining basis is depreciated using MACRS percentages.

[@billytheweasel]

Great vids, Thanks! In 1983 I rented my house out that I bought in 1981 and used 15 yr ACRS from '83 to '98. I've lived in it again since 2001 and will rent it out again soon. Just checking to see if I can depreciate again, at least the recent improvements. Good to see the bit about major appliances too!

[@TheTaxGeek]

A point that I wanted to bring up in the original video was conversion of a residence from personal to rental use, but I had to cut to keep from overloading my viewers with information. The rule is that the basis of personal property converted to business (or rental) use is either the lower of the original adjusted basis or the current fair market value, whichever is lower. The original basis would be the price you paid for the property originally less any depreciation you took (or could have taken). Since you completely depreciated the property under the 15-year ACRS effectively the original basis is zero. However, any permanent improvements you made to the property since 1998 would form a new depreciable basis for the property. Good luck and thanks for the question!

[@billytheweasel]

@@TheTaxGeek With your sound information I shouldn't need luck... But I'll take it! Thanks for your time and work.

[@sheldonwang6425]

Greetings The Tax Geek! Thanks for the video. I have a question about the Form 4562 for depreciation. Every year I file this form. For section B/h (b) Month and Year placed in Service, should I always fill the year that I rented the property? For B/h (c) Base for depreciation, should I always fill the base amount when I rented the property? Thanks so much!

[@TheTaxGeek]

Sorry to slide past the deadline. As you can imagine, I was pretty busy on the 15th. After the year you place the property in service, all you have to do on form 4562 is enter the total amount of depreciation you took. That amount goes on line 17.

[@2005andrulo]

First I like to thank for all the information and the simplified way for each video is very valuable , my quetion how can I fix my property depreciation ? I did report the land with the structure, i did not know that we need to separate the land , can I summit 1040X? if so how can I adjusted my wrong depresation for 2023, I do appreciated any help with this situation and thanks for the videos

[@TheTaxGeek]

It's not uncommon for property owners to accidentally depreciate the land the property sits on. To correct this, you would need to amend every return this error affects, and would probably owe a bit of tax with each amendment.

[@orrd]

This is the only information source that I have ever seen say you should proportion the closing costs based on the building/land ratio. It seems almost no one else does that adjustment. Do you have a source for that requirement? My understanding is it's not necessary to make that adjustment because the closing costs are a paid expense of the purchase that you don't get back when you sell the property (like you do with land). Similarly, we don't do that when amortizing points or deducting property taxes each year for example even though those costs too are partially coming from the land.

[@TheTaxGeek]

In the case of improved real property, that is, land with buildings and the like on it, there are two "bases," a basis for sale and a basis for depreciation. When selling the property, you treat the property as a unit and it is unnecessary to allocate basis to land or building. Same when you're amortizing points or claiming a deduction for property taxes. When you're depreciating the property, you include the closing or other acquisition costs when allocating between the building, which is depreciable, and the land, which isn't. This is demonstrated (albeit not very clearly) in IRS Publication 551.

[@skellercoviello]

Mr. tax geek: I received an insurance settlement to replace a roof on a rent house (that I had originally replaced several years ago for $4300, and I was depreciating it and there was about $2600 left to depreciate). Now that I replaced the roof; do I retire it and make the cost 0? If yes, do I do a new roof with cost to me ($1000 deductible) or is there a better way to handle this? Such as continuing to depreciate the old roof? thanks

[@TheTaxGeek]

This is considered a casualty or theft loss and can be a complex subject that is worthy of its own video someday. What you essentially did was "sell" your old roof to the insurance company for the amount of the insurance settlement. This will almost always create a gain, particularly if your insurance covers "replacement cost." This gain may be postponed if you replace the roof for at least as much as the insurance settlement. The old roof is disposed of for the insurance settlement, and the depreciable basis of the new roof is the adjusted basis of the old roof, plus any cash you had to pay out to replace the roof above and beyond the insurance settlement. This is definitely a situation you should discuss with a qualified Tax Professional, who can guide you in the right direction.

[@FigureWrestlingOffcial]

I’m just starting to prepare my mother’s taxes. She bought a duplex in 1995, she lives on one side and rents the other. I’m not sure what numbers her former tax preparer used so how would I go about figuring out how to fill out form 4562?

[@TheTaxGeek]

First of all, if the duplex was purchased in 1995, you're just about reaching the end of the original 27-1/2 year depreciation period. The best thing to do would be to try to find a copy of a previous tax return, which should have a depreciation table in it and provide all the figures you need to know. The next best thing would be to ask your mother how much she paid for the house when she purchased it. Subtract a reasonable value for the land (current property tax records will give you roughly what the ratio of land value to building value), and enter into the software that the building was placed in service in 1995. Remember to divide any depreciation expense by half because only one-half of the property is being rented.

[@FigureWrestlingOffcial]

@@TheTaxGeek Since it's 27.5 years does that mean that we wouldn't have to fill out that form next year?

[@javiervidal8182]

I could use the depreciation for my taxes I have only w2 that I earn 60,000 and they only give me 2,000 and they took 6,200 from my taxes thanks 😊

[@TheTaxGeek]

If you are paid on a W2, you can't take depreciation. You can only take depreciation on assets used in a business or a rental property.

[@knowledgeizhell]

@@TheTaxGeek Yes, but if he actively rented out property and had a loss on Schedule E, he could deduct up to $25,000 in losses (thanks to depreciation and mortgage interest, property taxes--the Schedule E portion, not Schedule A) against that W-2 income, correct?