Have you already heard about the various benefits of investing in Houston’s real estate? If you have, you now know that top of the list is the rental property tax deductions. And the most beneficial tax benefit according to most real estate investors is the real estate depreciation. Today, We will be showing you how to calculate the rental property depreciation, so that you may take advantage of it.
What is rental property depreciation?
Property depreciation is not like real estate appreciation in Houston, Texas, because it’s a form of tax savings. You can think of it as a tax deduction. However, there’s a caveat in that this concept relies on the investment real estate being used and worn out after a specific period. So the tax refund only occurs after the value of the property goes down. In essence, this is some sort of compensation and not a property expense.
Requirements for property depreciation
First off, you need to know that not all real estate properties are depreciable. The concept will only apply in the case of:
- The real estate has been registered under your name. It’s doesn’t even matter if it is subject to a loan. if you’re the true owner, it will be depreciable even if you have other obligations associated with it.
- The kinds of assets subjected to depreciation are income-producing assets. In other words, if the property is not an investment property, it’s not depreciable.
- The asset has to be subjected to wear and tear or in any other way that makes its value decrease over time.
- It has to last for at least a year. So if you were planning on demolishing the property within a year, you won’t be able to depreciate it.
When does depreciation start?
The count starts the day you are ready to rent out the property. for instance, let’s say you bought a distressed house in Houston, Texas in November. You then took three months to work on the repairs and upgrades, and on March 1st, you felt like the property want ready to be rented out. you take time to find a good tenant in Houston, Texas, and by the time you find one, the lease starts on May 1st. when does the depreciation start? The depreciation will start on March 1st because that’s the time you were ready to rent out the property.
For how long can an investor in Houston, Texas depreciate a rental property?
If you’ve invested in real estate in Houston, Texas, you can keep on depreciating it until:
- You no longer need the property to earn more income
- You reach the cost limit
Calculating depreciation on rental property
First, you need to calculate the basis. This is what you paid for the property regardless of the financing strategy you used. You should also remember to include the transfer taxes, legal fees, and title insurance. Then you have to separate the cost of land from the building. Finally, adjust the value and viola! You got your answer.
You can learn more about rental property depreciation from real estate professionals like us. Call today, and we will help you make smarter decisions while investing.