– ARE YOU TAKING EVERYTHING YOU CAN?
© Copyright 2001-2011 Landlord.com
By Bob Cain
2000 Cain Publications, Inc.,
used by permission
You are probably costing yourself money.
Most investment property owners divide the cost of real estate between
land and building, then depreciate the building over 27.5 years in equal
Not every part of your
rental property is real estate. You have a host of other pieces of
property that aren’t real estate, and those can be depreciated over a
much shorter period of time. Plus, there is one provision of the tax law
that allows you to deduct a huge portion and possibly the entire cost of
some property you would normally depreciate in one year.
Look at the depreciation
schedule below taken from Internal Revenue Service instructions.
Refrigerators, ranges, dishwashers,
carpeting, furniture – 5 years
Land improvements (sidewalks,
fences, landscaping shrubbery, septic systems, water pipes) – 15
Computers and peripherals – 5
Typewriters, adding machines,
copiers – 5 years
Automobiles and trucks under 13,000
lbs. – 5 years
Office furniture (desks, chairs,
file cabinets, etc.) – 7 years
Residential rental property
building – 27.5 years
Non-residential rental property –
You are allowed by law to
separate all of these pieces of property from the value of the building
and depreciate them individually on IRS Form 4562. As we will see later,
that can make or save you thousands of dollars a year on your taxes.
This is a program that
allows you to expense at least part of what would normally be a
depreciable item. You can claim the section 179 deduction of up to $20,000
for the 2000 tax year on property you might otherwise depreciate for the
cost of qualifying property acquired for use in the rental property
business. At the same time you cannot claim the deduction for the cost of
property you hold for the production of income, such as your rental
The requirements are:
You must elect to expense the year
you purchased the item or with an amended return for that year.
You can deduct only on the basis of
the amount of cash you paid. So if you trade in a truck for another
truck, you can only deduct the amount of cash you paid or will pay,
not the amount of the trade-in. With vehicles, note the special
It must be “tangible personal
property,” which means not real property. Land and land improvements
and other permanent structures and their components are real property.
Swimming pools, paved parking areas, and fences are examples of land
improvements. Those must be depreciated straight line according to the
The amount you deduct cannot exceed
your taxable income. You
may not use section 179 expense method for:
property you hold for the production of income, such as rental
houses, vending machines, coin-operated laundry, air conditioning or
heating units, etc.
If the amount of the
deduction for the section 179 expense is less than the cost of the item,
you must deduct the remainder of the cost over the depreciable life.
Automobiles and trucks are
a special case. While you can use the section 179 deduction for cars and
trucks, the deduction is limited to $3,060 the first year, $5,000 the
second year and $2,950 every year thereafter.
Here’s how much money these benefits
can save or make you.
First, if you bought the
building with appliances and such included, divide the purchase price of
the property into real and personal property.
Second, break out the
property improvements, such as paving, fences, landscaping, underground
pipes, etc. Add those to your 15-year depreciable property.
Third, divide the
remaining property into land and improvements and depreciate the
improvements over 27.5 years.
Even when you divide the
property between raw land and improvements, you may be cheating yourself.
Too often rental property owners take the value the county tax assessor
puts on the raw land as its value. Remember, the land has pipes running
under it, both water and sewer, or a septic tank.
You can also establish the
value of the land by the comparable sales method. Calculate what other
lots of similar size sold for in the area. These would be lots without
improvements, such as fences and outbuildings. If the dollar amount you
come up with by doing that is in your favor, that is if it is less than
the amount the county tax assessor figured, use it.
Calculating the value of
the land yourself could end up making you a chunk of change on your taxes.
Say, for example, that the county tax assessor says the value of the land
under your apartment building is $100,000. However, after you do your own
research, you discover that similar lots in the area are selling for
$80,000. Now deduct the value of the pipes under the building. You
calculate their value to be $5,000. In addition, let’s say the total
cost of the property was $250,000.
Using the county tax
assessor’s figures your depreciation would be $5454.00 per year.
However, after your research you do much better.
The building value would
be $170,000, creating an annual depreciation deduction of $6181.00, or an
extra $728.00 per year in tax savings, just on the building. Now figure
the deduction on the pipes underground. You calculated that they are worth
$5,000. Since those are depreciated over 15 years, your additional
depreciation would be $333.00. That brings you a total of $1061.00 extra
in depreciation, just for a little research on your part.
One more calculation:
suppose your new property has a fence surrounding it and is well
landscaped. You calculate the value of the fence and landscaping to be
$5,000. Since both the fencing and the landscaping is 15-year property,
you can deduct $333 per year for that. That is a saving of $152 per year
over depreciating it at 27.5 years.
If you replace appliances,
carpeting, fencing, heating or air conditioning units, landscaping or any
other piece of tangible property we have talked about, make sure you begin
depreciating it in the year you put it in service and don’t add it to
the basis of the real property.
With our profits becoming
increasingly marginal because of higher taxes and government regulations,
we need to take advantage all the monetary benefits we can. Surveying how
we are taking depreciation, then using all the tax benefits that Congress
has provided can make a big difference in our bottom lines. Any questions
or concerns you have must be addressed to a tax professional. While all
these deductions are your right, there are often specific rules that need
to be followed to take them. Failure to follow them could lead to an IRS
audit, or at least the need to file an amended return.
Robert Cain is a nationally-recognized
speaker and writer on property management and real estate issues. For a
free sample copy of the Rental Property Reporter call 800-654-5456 or
visit their web site at