Question: Can I deduct rental property depreciation related expenses?
Answer: Yes, rental property depreciation expenses are a commonly forgotten tax deduction.
Depreciation is one of the biggest expenses available to owners of rental properties but it is commonly missed.
Depreciation rental property expense, also known as the depreciation deduction, can be a quite a large deduction. For a residential rental property, the depreciation deduction is approximately the purchase price of the property plus improvements divided by 27.5 years.
So for example, if the purchase price + improvements was $275,000, then the annual depreciation deduction would be $10,000 per year ($275,000 divided by 27.5 years). If you missed a $10,000 tax deduction, that could be a very costly mistake on your tax return. Land value must be taken into consideration, but that is an approximate calculation to show that this deduction can be substantial.
The depreciation rental property expense (depreciation deduction) is one of the primary reasons that taxable rental income gets reduced and helps lower your tax liability. It’s important to note that whether you use the depreciation deduction or not, the IRS assumes that you are using it, so you should make sure you take it.
In the case that you haven’t included depreciation as one of your rental property expenses, it is highly recommended that you file an amended tax return to utilize that expense. Form 1040X would have to be filed with the appropriate tax forms and schedules.