Depreciation of Inherited Property

by C. Taylor, Demand Media
    Rental property can be depreciated over 27.5 years.

    Rental property can be depreciated over 27.5 years.

    Properly managing inherited real property means maximizing your return to build a suitable nest egg for your blossoming marriage. If you decide to rent the newly acquired property, depreciating the property will help offset rental income to minimize taxes owed. Although this is complicated enough with purchased property, inherited properly adds an additional level of difficulty by not having an obvious purchase price to serve as a initial cost basis.

    Depreciation

    Depreciation allows you to deduct the inherited property's value over several years, but this depreciation is limited to structures. According to the Internal Revenue Service, land does not wear out or become depleted, so you cannot deduct land value when depreciating the property. Depreciation does not allow you to gain money from the IRS, but it allows you to offset income generated by, or in association with, the property up to the total amount earned.

    Requirements

    To be eligible for deprecation, you must own the property, which means the legal transfer of ownership must be completed after the death of the original owner. The property must also be associated with an income-generating activity, such as a rental property or property used in conjunction with your business. According to the IRS, depreciation additionally requires the property to have a "determinable useful life" of more than one year, but this requirement is already met by the nature of real property.

    Cost Basis

    The inherited property's cost basis if the amount being depreciated over the useful life of the property. This value is estimated by the fair market value at the time of the decedent's death, minus any estimated land value. As an example, if comparable properties were sold at that time for $200,000 and $50,000 of that is considered land value, the cost basis is $200,000 minus $50,000, or $150,000. You may also add legal, survey and recording fees to this sum when incurred during the ownership transfer.

    Recovery Period

    The recovery period is the number of years over which the property is depreciated. This period depends on the property's usage. For residential rental properties, the recover period is 27.5 years, but for business use of homes or commercial rentals, the recovery period is 39 years.

    Calculating Depreciation

    Dividing the cost basis by the recover period will calculate the annual depreciation. If the property is only partially used in conjunction with an income-producing activity, you can only deduct the percentage used for business purposes. In the previous example, if only 25 percent of the $150,000 cost basis property was used as a home office, dividing $150,000 by 39 years calculates the gross depreciation of $3,846. Further multiplying this figure by the 25 percent business usage calculates your total depreciation of $962.

    About the Author

    C. Taylor has been a professional writer since 2009. He has written for online publications and the "Journal of Asian Martial Arts." Taylor specializes in martial arts, traveling, sciences and computer repair. He received a Master of Science in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences from the College of Charleston.

    Photo Credits

    • Hemera Technologies/AbleStock.com/Getty Images