If you own a rental property, it’s important to make sure you’re claiming enough depreciation — especially if you’re looking to sell in the next few years.
Depreciation is the decline in value of an asset, and when it comes to investment properties, it’s a tax deduction you’re entitled to claim. But as our research shows, many property investors are leaving thousands of dollars on the table by not claiming enough depreciation.
If your accountant is claiming 2.5% depreciation for your residential property, they may be costing you over $50,000 in potential tax deductions.
When Can You Claim Depreciation?
To get the full tax benefit from an investment or property, you must be able to write off part of its cost each year. The IRS allows you to deduct the portion of an asset’s cost that has worn out over time (called depreciation) from your income when you use the asset for your work. You can start depreciating an asset as soon as you put it to work in your business and stop when you’ve recovered its cost or you no longer use it in your business. Whichever happens first.
What Can Be Depreciated For Tax Purposes?
Most people who are trying to save money want to know what they can depreciate for tax purposes. The basic rule of thumb is that if you buy something to produce income, you can depreciate it. Here are some examples of things that you can depreciate:
- Buildings and their structural components, such as HVAC systems, plumbing and lighting
- Machinery, equipment and furniture
- Vehicles such as cars, trucks and delivery vans
- Office equipment like computers, printers and copiers
- Property used to furnish lodging
- Property that you lease to another business for use in its trade or business
You Can Also Depreciate Certain Intangible Property
Intangible assets don’t have a physical presence, but they do have value to your business. Some examples are:
- Copyrights, patents, and other intellectual property you bought or acquired by gift or inheritance
- trademarks
- computer software.
What Can’t You Depreciate?
While there are many things that you can depreciate, there are a things that you can not. Assets that have a life expectancy of less than one year, for example, do not qualify for depreciation. Here are some non-depreciable assets:
- Land.
- Collectibles like art, coins, or memorabilia.
- Investments like stocks and bonds.
- Buildings that you aren’t actively renting for income.
- Personal property, which includes clothing, and your personal residence and car.
- Any property placed in service and used for less than one year.
Bonus Depreciation Works on Used Equipment Too
Imagine buying a used piece of equipment for $168,000. You have maximized section 179 deductions. But your accountant says you can’t use bonus depreciation because you bought used equipment. This is what happened to several business owners we’ve met.
But the truth is most of them did actually qualify for bonus depreciation on that used equipment! And you probably do also. The trick is knowing the correct rules about when bonus depreciation can be applied.
Under Section 179, you can deduct the full $50,000 on your taxes (assuming you meet the other requirements for Section 179).
What Is A Section 179 Deduction Depreciation?
Section 179 is an immediate expense deduction business owners take for purchases of depreciable business equipment instead of capitalizing an asset. Section 179 of the United States Internal Revenue Code, allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated.
The Section 179 deduction was created to encourage business owners to purchase needed assets. The deduction provides cash flow to small and medium-sized companies in the form of a tax deduction for any assets it purchases during a given year.
Here are three tips for maximizing your Section 179 deductions:
1. Take advantage of bonus depreciation for new and used equipment
2. Buy or lease equipment by December 31st, even if you don’t want it to arrive until next year
3. Buy more than $500,000 worth of equipment
A Good Accountant Can Make Sure You Don’t Miss Out On Any Deductions
We are experts in the tax rules around bonus depreciation and section 179 deductions. And we know well over 100 other federal tax planning strategies we can line up with these deductions to reduce your tax liability. The Section 179 deduction and bonus depreciation are two ways to get your entire tax break upfront.
So, if you want to learn more about depreciation, get in touch with our firm today. Wasatch CPA Services LLC in Spanish Fork. We look forward to speaking with you.
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