Investors have a key goal of securing a high passive income from their properties. Here’s how a rental property depreciation calculator can help.

Table of Contents

  1. What Is Rental Property Depreciation?
  2. How Does Rental Property Depreciation Work?
  3. When to Calculate the Depreciation of Your Rental Property and Why
  4. How to Calculate Depreciation for Your Rental Property
  5. What About Rental Property Deprecation Recapture?
  6. How to Find a Profitable Rental Property
  7. To Recap

In this article, we will look into what depreciation is in real estate and how it lets investors take a tax break on their investment properties. Then, we will look at a rental property calculator with depreciation and how it could benefit investors. Finally, we will look into other useful real estate tools to find profitable investments.

What Is Rental Property Depreciation?

Before we look into real estate, you may be asking yourself: what is depreciation? Generally speaking, depreciation is when something slowly loses value over time because of common wear and tear. This relates to rental properties in real estate as over time, they slowly lose value as, like any other property, they need to be updated and cared for to keep up with the housing market.

In real estate, rental property depreciation is when investors deduct the costs that come along with purchasing a property and doing maintenance and repairs on it to be a competitive rental listing. Instead of taking a single large tax break the year you purchase and improve the property, depreciation slowly returns the deduction over the entire lifespan of the property.

The timeline in which this depreciation is returned is known as the recovery period. This period can vary depending on the type of real estate property and the value of the property. The recovery period in which depreciation can be claimed on residential buildings can be over 27 years. Additionally, commercial real estate buildings have an even longer recovery period of over 38 years.

Typically, people utilize a rental property depreciation calculator to help with these estimates.

Related: 7 Real Estate Tax Benefits to Take Advantage of

How Does Rental Property Depreciation Work?

Basically, in order to get these tax reductions, real estate investors must convince the IRS that their property has a purposeful life. After the IRS approves that your rental property indeed falls under the category of having useful life, you are then qualified for these tax breaks. Once you are approved, you can begin determining your property’s depreciation on rental property calculator.

How Do I Report My Property to the IRS?

The typical way to report your depreciation for your rental property is by filing the 1040, Standard E form. Other forms may apply if your specific property has other circumstances as well. For example, you may need to use a 4562 form to claim depreciation if you are filing the location the same year you are also using it as a rental property.

It is also important to note that some rental properties require rental income to be reported in your taxes. The only way to go around this rule is if the property is used primarily as a residential home and rented out for only less than 15 days in a year. But this also means you will not be able to deduct rental expenses from your taxes.

If you have any questions about claiming depreciation on a property, reach out to your financial advisor to answer any questions. Additionally, consider using a rental property depreciation calculator to help.

Related: Top 6 Tax Tips on Reporting Your Rental Income

When to Calculate the Depreciation of Your Rental Property and Why

To start, investors choose to claim depreciation on their investment properties because it ultimately saves them money in the long run. It is a great way to maximize the gains on your property and allow you to generate more profits. Overall, it reduces the taxable income, so investors usually choose to calculate the depreciation of their rental properties.

Typically, you would need to do these calculations just before your property is available to be rented out. This is because once your property is listed and ready for tenants, you are able to claim depreciation, so calculations must be done beforehand. These calculations can be done by a depreciation calculator for rental property.

How to Calculate Depreciation for Your Rental Property

Before you can begin to calculate depreciation for your rental property, you must ensure you meet the conditions to qualify for this tax reduction. 

  1. You must have ownership of the property. There are very limited to no exceptions to this first rule.
  2. The rental property must produce a source of income.
  3. You must be able to prove this property is useful. This can vary based on property, but for rental listings and a lot of real estate properties, it is fairly standard.
  4. The property must be considered useful for more than a one-year lifespan. If it isn’t considered to be useful for over a year, you will not qualify for depreciation.

Once these above conditions are met, you are able to begin your calculations.

Basically, there are three essential steps to calculating depreciation in real estate. First, you must find your overall costs. Then, divide those costs by the depreciation plan you chose or the lifespan of the property’s “usefulness.” Lastly, calculate your specific depreciation schedule with the help of a rental property depreciation calculator. Below we will look more in-depth at these three steps.

1. Determine Overall Costs

To start this process, you need to consider certain aspects of your cost basis such as closing costs and property value. It is likely your property value is simply the purchase price of the listing. This is common for rental investments. Though, if you have been living in a building and have then converted it to a rental property, an appraisal may be needed to determine the property value.

For closing costs, you need to take into consideration the following fees:

  • Property Taxes
  • Fees for Utility Services
  • Abstract Fees
  • Legal Fees
  • Transfer Taxes
  • Title Insurance
  • Recording Fees
  • Surveys
  • Real Estate Agent Fees

2. Divide Cost by Lifespan of Property

In this step, you take your cost basis from step one and divide it by the years that your rental property is considered to have a useful life. In real estate, this lifespan usually averages about 27.5 years. 

3. Calculate Depreciation Schedule

Note that you can only claim depreciation when the property is actually in service. This means if you purchase the property in January, but it’s not ready to be listed until June, you cannot claim depreciation until you listed the property. This sort of complicates things for the first year, as you can only claim once it is being rented.

In most cases, investors like to take advantage of a rental property depreciation calculator to help them with these calculations. We will look into some options of depreciation rental property calculators.

What About Rental Property Deprecation Recapture?

Rental property depreciation recapture occurs when an investor decides to sell the property that they have claimed depreciation on. Basically, the IRS has a requirement that makes investors pay taxes for the depreciation expenses taken on the property. This could impact the overall profits made from the rental property, as additional taxes must be paid if it is sold.

A great way to find out the specific taxes that would have to be paid if you sold your property is to use a rental property depreciation recapture calculator. Many real estate platforms offer tools that help do these calculations for you.

It is possible to defer, or completely eliminate the depreciation recapture if you are looking to sell your investment property, but it can be difficult and end up costing additional money to do so. It is important to do research before selling an income property with depreciation.

Related: Home Selling Tips 2022—The Complete Seller’s Guide

How to Find a Profitable Rental Property

Though a rental property depreciation calculator is a helpful tool for investors, there are many other services needed to determine a property’s profitability. Mashvisor is a great platform to visit to access a variety of tools and services that help locate profitable investments.

Even though Mashvisor does not specifically offer a rental property depreciation calculator, we do have another essential real estate calculator. One tool we recommend investors use to determine how much money their income property can make is our Investment Property Calculator

Our rental property calculator helps you figure out the potential cash flow your rental can produce. To make this possible, we use data from the most accurate and reliable sources such as Airbnb and the MLS. This ensures our analysis offers you trustworthy data.

Rather than keeping track of spreadsheets with complicated data, Mashvisor’s rental calculator estimates your finances for you instead. The first thing this tool offers is pre-calculated real estate data on your property. This includes property tax, interest rate, and maintenance and repair costs. This helps you plan and stick to a budget for your entire investment.

Then, we offer a comprehensive rental strategy comparison. What this means is we show you how your property will perform as a short-term rental vs a traditional rental. This makes it possible to decide how to list your property for the highest possible profit. To determine which rental strategy is more productive, we compare common metrics. Below are some of the essential data we provide:

  • Cap rate
  • Cash on cash return
  • Rental income
  • Cash flow
  • Occupancy rate

So, even though we don’t exactly offer a depreciation calculator rental property, our rental calculator helps investors make the most profitable decisions for investment properties.

Rental Property Depreciation Calculator: How to Find a Profitable Rental Property

Mashvisor’s rental property calculator can help you determine if a listing you are looking at has profit potential for your chosen rental strategy.

The Property Finder

Aside from our investment property calculator, we also offer tools to help find available income properties in any location in the US. This tool is called Property Finder. Rather than searching through a ton of websites, reading the newspaper, and calling local agents to hear about available properties, you can see all listings using our tool.

You can search through any location to find properties that fit your needs. We also offer filter options to narrow down your search so you can only look at the locations that would be lucrative for a rental property. Below are some of the filters you can use to find your perfect property:

  • Location ( you can search multiple cities at once)
  • Property type
  • Budget
  • Number of bathrooms
  • Number of bedrooms 
Rental Property Depreciation Calculator: The Property Finder

Mashvisor’s Property Finder can help you find the best investment property for your chosen rental strategy in up to five US cities.

To Recap

A rental property depreciation calculator can be a great tool for investors looking to find out the depreciation on their rental property. Depreciation in real estate is basically a tax benefit that allows investors to save money on their income properties. Once they purchase a rental location, they likely just have to do updates and renovations to make it functional. These additions will also make it useful.

It is essential in depreciation to have a property that is considered useful, as that is how the IRS approves this tax break. For rental properties, it is pretty standard to have a recovery period of 27.5 years in which you can claim depreciation. During these years, you will slowly get back the costs of maintaining and keeping a rental property through your tax returns.

People typically use a depreciation calculator to help do these tricky depreciation estimations. Though, if you want to do them by yourself, you can simply follow the three steps mentioned above.

Although Mashvisor doesn’t specifically offer a rental property depreciation calculator, we have many other essential tools and services you’d need to run a successful rental business. Our rental property calculator is a great tool to determine the best strategy for managing your property. Here, you can see both pre-calculated real estate costs as well as a comprehensive rental strategy comparison.

Additionally, our Property Finder tool helps investors find the most profitable listings in any US location. It is important to choose a rental that will produce a high return on investment, and this tool shows the data needed to pick the best investment property.

To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.

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