Depreciation is the income tax procedure that allows you to deduct the cost of an asset with a long period of usage. The property type determines the number of depreciation years, which is called the recovery period. In addition to assets used in business, investment property that produces income is depreciated. However, no depreciation is allowed on land or securities held for investment. Instead, depreciable investment property deteriorates from wear and tear, such as rented real estate or equipment.
1. Determine the depreciation table to use for your investment property by examining the MACRS Percentage Table Guide in Appendix A of IRS Publication 946. The row for General Depreciation System (GDS) applies unless your property is listed on page 34 of Publication 946 requiring use of the Alternative Depreciation System (ADS). The applicable recovery period is based upon the property descriptions on page 35.
2. Locate the correct depreciation table in Appendix A of Publication 946.
3. Identity the percentage to depreciate by using the row on the depreciation table corresponding to the ownership year for which depreciation is calculated. Depending upon the table, the column is either the recovery period for the property type or the month of the first year the property was used for investment purposes.
4. Multiply the percentage to depreciate by your cost for the investment property. This is the tax-deductible depreciation expense for the year.
5. Record the depreciation expense on the tax form reporting your income from the investment.
- The depreciation for improvements to an investment property is calculated separately from general depreciation.
Items you will need
- Internal Revenue Service Publication 946
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