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I've recently purchased an out of state rental property. I'd like to be ahead of the game and fully grasp the concept of depreciation so that when tax season comes around, I won't be clueless.

I've purchased the home for $72,500 by putting 20% down on a conventional loan. The appraisal came back at $73,000 so I've walked in the door with $500 in equity right off the bat (not sure if it's important to note this but I did just in case it's important).

I know that the land and the physical property sitting on the land have different values so with that being said, the land's worth $9,000. This means the physical property's worth $63,500 ($72,500 - $9,000).

11.5 months (You're not allowed to write off a full year's worth of depreciation based on the IRS tax code assuming the property was put in service January 1st) / 330 total months (27.5 years) = 0.0348484848

If do $63,500 * 0.0348484848 = $2,178.03 - Is $2,178.03 the correct amount I can write off in terms of depreciation on my rental property?

Also, based on my what I've been reading, does this mean I get a check from the IRS for $2,178.03?

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If do $63,500 * 0.0348484848 = $2,178.03 - Is $2,178.03 the correct amount I can write off in terms of depreciation on my rental property?

No, it looks like you've applied the half month adjustment to every year.

You've got 330 months to depreciate the entire improvement cost (houses are viewed as improvements to the property/land)

Monthly depreciation = 63,500/330 = 192.4242

So most years you'll have $2,309.09 in depreciation expense. The first and last years will depend on when you placed it into service. If the property was placed in service in January, the first year you'd have 11.5 months (192.4242*11.5 = 2,212.88) and the last year you'd have 6.5 months (192.4242*6.5 = 1,250.76)

Also, based on my what I've been reading, does this mean I get a check from the IRS for $2,178.03?

No, it's not a tax credit, it's just reducing the amount of income you pay taxes on.

Think of the rental like a business, you collect rent (revenue) and pay expenses, and are hopefully left with profit, and then you're taxed on that profit. Depreciation is just one of many expenses you'll incur that can offset the rent you received. Depreciation is different from other expenses because it doesn't affect cash flow (unlike writing a check for property taxes or repairs). Depreciation is also unlike other expenses because it is re-captured when you go to sell the property.

If at the end of the year you had a loss from your rental those losses could offset ordinary income and reduce your taxes owed, but there are a few rules/limitations that govern whether and how much of your rental losses can be deducted.

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  • Thanks for the explanation, Hart. So if I'm understanding this correctly - Let's say my total expenses for the year's $7,300 (excluding depreciation). My depreciation expense alone for the year's $9,757. If do $9,757 - $7,300 = $2,457 - Is $2,457 the amount. Dos this mean I can subtract $2,457 from the $7,300 and I'd need to pay the difference of $7,300 and $2,457 out of pocket?
    – Donny
    Sep 19 '21 at 16:42
  • No, you just add depreciation to your other expenses. Your rental profit/loss is just the total rent collected less the total expenses (including property tax, depreciation, mortgage interest, etc). So you have $20k in rent and $15k in expenses, you'll pay income tax on the $5k profit. Depreciation is just adding to the pile of expenses that cuts into your profit for tax purposes.
    – Hart CO
    Sep 19 '21 at 19:05
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I've recently purchased an out of state rental property. I'd like to be ahead of the game and fully grasp the concept of depreciation so that when tax season comes around, I won't be clueless.

...

Also, based on my what I've been reading, does this mean I get a check from the IRS for $2,178.03?

I am not going to address the math involved in calculating the depreciation. The tax instructions do a good job explaining what happens during the first year. The fact that you know to split the land from the building is a good start.

I am going to address the overall concepts regarding the tax situation with the rental property.

You will have income in the form of the rental payment from the tenant. You want to track all your expenses to reduce the amount of that income that can be taxed bu the federal and state government. Note depending on the states involved expect to have to file in two states.

The most obvious expense you have, the mortgage, isn't as as straight forward as many expect. You can claim the interest you pay as an expense, but you can't claim the principal payment. This is because the amount of the loan wasn't income. This can result in some situations where the landlord thinks the property is losing money but the IRS disagrees.

The good news is that the condo/HOA fee, property tax, house insurance are expenses you can claim. Since some or all of these are funneled through your mortgage company make sure that you get and keep the detailed report from the mortgage company to make sure all the expenses are documented and assigned to the correct year. Sometimes you have to split some expenses across two different years.

There may be other expenses such as a management fee that you don't want to forget. Sometimes the owner pays the utilities, if you do that don't forget to claim them.

Depreciation is a big item. It can makeup for the inability to claim the principal payment.

Because this is the first year you should also make sure that you have fully accounted for the closing costs and other items you paid at closing. Frequently you have to pre-pay for insurance, or taxes. Make sure you don't forget anything, also make sure you don't double count it. Some items on the closing documents could be mentioned on the detailed annual statement from the mortgage company.

All the numbers from this property will be rolled into all the other numbers on your tax forms. Depreciation by itself will not trigger a government check.

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