Depreciation for Rental Properties: A Step-by-Step Guide

Homeowners who rent out a home they do not live in for additional income should calculate depreciation on the home for tax purposes. Spreading out the cost of the home over a number of years reduces rental income from the home on tax returns during each year the home is used as a rental property. For residential real estate, calculate depreciation on the home over the 27.5 years you are allowed to deduct it for tax purposes.

Calculate Annual Depreciation

Step 1

Look up the cost basis for the home being used as a rental property. In most cases, this amount is the total purchase price of the home, including both the down payment and the mortgage amount. If you lived in the home before converting it to a rental property, the cost basis is the lower of either the purchase price or the fair market value at the time of conversion to a rental property.

Step 2

Subtract the fair market value of the land from the cost basis of the rental home because land is not subject to depreciation. For example, if you purchased a rental home for $270,000 and the land on which it sits is worth $30,000, then you will be able to depreciate $240,000 for tax purposes.

Step 3

Divide the value of the rental home by 27.5 years to find the annual depreciation of the home. For example, $240,000 divided by 27.5 equals $8,727 of home depreciation per year to include on your tax return.

Calculate First Year Depreciation

Step 1

Count the number of months from the first point when the home was available to be rented until the end of the calendar year. The first of these months only counts as half of a month, so if the home was available beginning in September, it counts as 3.5 months for tax purposes.

Step 2

Divide the number of months by 12 to find the portion of the year's depreciation to claim. In the above example, 3.5 divided by 12 is 0.29 of the year.

Step 3

Multiply the portion of the year the home was a rental property by the annual depreciation you had calculated. In this case, 0.29 times $8,727 is $2,531 of depreciation to claim for the first year.