How Depreciation Works

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Depreciation is a term you’ll want to know and understand if you own a rental property. It’s one of those rare deductions you get without spending another dime other than what you paid to buy the property.

You can also take a depreciation deduction every year you own the property, even if the value increases. What matters, though, is whether it’s a commercial or residential real estate investment.

A motel, for example, is a commercial property, but an apartment building is a residential rental property. This differentiation creates different terms for depreciation, including the timeline and how much you can deduct.

To ensure you’re getting the right amount of depreciation, it’s important to understand your property’s classification. If you use the property for residential and commercial tenants, it gets even more complicated. To take the residential depreciation deduction, over 80% of the income earned from the property must be from residential rental units.

Some properties that you think are residential are classified as commercial by the IRS. This happens when the term the residents stay is short, such as an Airbnb.

If you think you filed your taxes with the wrong depreciation period for your property, filing IRS Form 3115 to fix it is important.

If you are unsure on how to proceed or need guidance to fix past issues, contact us today, and we’d be happy to help.