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Linear Depreciation Formula:
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Linear depreciation for rental property is a method of allocating the cost of a rental property over its useful life. The IRS allows residential rental properties to be depreciated over 27.5 years using the straight-line method.
The calculator uses the linear depreciation formula:
Where:
Explanation: This formula calculates the equal annual depreciation expense that can be deducted for tax purposes over the 27.5-year recovery period.
Details: Accurate depreciation calculation is crucial for tax planning and reporting. It reduces taxable income from rental properties, providing significant tax benefits to property owners over the depreciation period.
Tips: Enter the original cost of the rental property in dollars. The cost must be a positive value representing the property's basis for depreciation purposes.
Q1: Why is 27.5 years used for rental property depreciation?
A: The IRS specifies 27.5 years as the recovery period for residential rental properties under the Modified Accelerated Cost Recovery System (MACRS).
Q2: What costs can be included in the depreciation basis?
A: The basis includes the purchase price plus any closing costs, legal fees, and improvements that add value to the property or prolong its life.
Q3: When does depreciation begin and end?
A: Depreciation begins when the property is placed in service and ends when the cost basis is fully recovered or the property is disposed of.
Q4: Are there different depreciation methods?
A: While straight-line is most common for rental properties, other methods exist but straight-line is typically required for residential rental properties.
Q5: How does depreciation affect taxes when selling the property?
A: Depreciation recapture rules apply when selling, meaning previously deducted depreciation may be taxed at a higher rate upon sale.