Depreciation

• There are three basic factors that determine how much depreciation you can deduct from the value on your rental property: your cost basis in the property (amount of money borrowed, materials, and labor costs), recovery period for the property and depreciation method. The IRS allows depreciation under the modified accelerated cost recovery system (MACRS), which classifies the lives of assets into different recovery periods. MACRS only uses general depreciation system (GDS) and alternative deprecation system (ADS) as choices for depreciation methods. GDS uses a 27 1/2-year life for residential property while ADS uses a 40-year lifespan.
  
  

Requirements

• You can depreciate the value of your income-producing property if it meets all IRS requirements. First, you must be the owner of the property. Second, you use the property for income-producing activity. Third, the property has a determinable useful life. Finally, you expect the property to last for more than one year. Land is not subject to depreciation.
  
  

Failing to Take Depreciation

• The IRS assumes that a rental property loses value every year. By not taking depreciation, you lose out on the tax savings. Even if you elect not to report depreciation on your tax return, the IRS assumes you've taken it anyway. When you sell your property, you will have to pay tax on recaptured depreciation even if there is no recapture amount to take. In this way, the IRS makes taking depreciation on investment property mandatory.
  
  

Insight

• If you failed to take depreciation on your investment property, you can report the depreciation on your current tax return. You can also file an amended return. The IRS allows you to file an amended return for the previous three years. The rules for depreciation of investment property can be complex. Use an accountant or tax specialist to help you file your tax return and to ensure that you receive the maximum tax benefit from depreciating your investment property.