Real estate depreciation is defined as an income tax deduction that allows a taxpayer to recover the cost (or other basis) of a real estate investment. The depreciation is realized as a type of deduction that reduces the investor’s taxable income.

How do I deduct real estate depreciation?

If you own a rental property for an entire calendar year, calculating depreciation is straightforward. For residential properties, take your cost basis (or adjusted cost basis, if applicable) and divide it by 27.5.

How long does it take to depreciate a rental property?

While depreciation can give you valuable yearly write offs, it can also come back as additional tax liability when you sell the property. Residential rental property is deductible over a 27.5 year recovery period.

Do you have to pay taxes on depreciation on real estate?

That isn’t always true for real estate. In fact, real estate often increases in value. If you sell for more than the depreciated value of the property, you’ll have to pay back the taxes that you didn’t pay over the years due to depreciation. However, that portion of your profit gets taxed at a rate up to 25%.

Do you pay recapture tax on depreciation of rental property?

You usually save more money through depreciating than you pay in recapture. It’s true that if you sell your depreciated rental property for more than its depreciated value, the IRS will hit you with a depreciation recapture tax when you sell it.

What happens to your depreciated property when you sell?

When You Sell If you sell your property for more than its depreciated value, the IRS takes back the tax that you would have paid on the amount you depreciated. To do this, it levies a special tax called depreciation recapture tax. The amount of money that is subject to this 25 percent tax depends on your final selling price.