How Do You Deduct Depreciation of Assets?

Deductions for depreciation can be complicated, but profitable enough to make it worthwhile to spend time learning about them.

Depreciation is not an optional deduction. Even if you choose to ignore it, the IRS will calculate depreciation when you sell the property by adding the depreciation you should have claimed to your sales profits, thereby increasing your capital gains tax bill. In other words, the IRS acts as if you have taken this deduction even if you haven’t, so it’s worth taking advantage of.

The basic concept of depreciation is that the cost of certain assets are not the daily operating costs, yet they deserve some sort of tax deduction once the asset meets the following criteria:

  • Lasts for more than a year

  • Gets worn-out or depleted over time

  • Remain in your hands as owner for more than one year

  • Is used in your rental business.

Examples of common depreciable assets for landlords include the building itself and its structural components, personal property purchased for the rental property (such as appliances, furniture, and carpets), and personal property purchased for use in the rental property, such as tools and equipment.

However, the IRS says that you can currently deduct any item you buy for your rental property that costs $200 or less, even if is a long-term asset. For example, you could currently deduct a $100 sofa you buy for your rental, even though it is a long-term asset that will last more than one year. Furthermore, you can deduct even more assets, including property costing up to $2,500, using the "de minimis safe harbor" discussed below (see “IRS Regulations on Deducting Repairs and Improvements”).

You can combine the depreciation of your rental property (all buildings, components, and improvements) with personal property assets within it (such as appliances), or depreciate them separately. Separating them is more difficult, but if you do not increase your total deductions, you will be granted higher deductions in the first years of ownership.