Depreciating Rental Property

“Depreciation” is an accounting term for writing off the wear and tear on an asset that has a useful life of more than one year and costs over $200. Generally, rental real estate improvements must be depreciated over a period of 39 years. However, there are exceptions for residential rental real estate, which is depreciated over 27.5 years and most personal property such as furniture, equipment, etc., which is depreciable over 5 or 7 years.

There are also special rules that allow routine maintenance to be expensed rather than capitalized and depreciated, where a taxpayer reasonably expects to perform the routine maintenance expenses more frequently than once during a ten-year period. Small taxpayers, those with $10 million or less average annual gross receipts in the three preceding tax years, can elect to currently deduct, rather than capitalize amounts paid during the tax year for repairs, maintenance, improvements, and similar activities performed on an eligible building that does not exceed the lesser of $10,000 or 2% of the building's unadjusted basis.

In addition, there is a partial disposition election that allows a taxpayer to report gain or loss on the disposition of a partial asset such a roof, AC system, etc. However, if the partial disposition election is made, the replacement must be capitalized, even if otherwise deductible.

There are additional special rules applying to land rentals, leasehold improvements and restaurants.

Please call this office for more information related to these complex rules and special situations.

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