When you buy investment property, the IRS lets you claim just about every expense that you incur as a deduction against your income with one exception -- the money that you spend to buy the property. Instead of writing off the purchase price for the property in a lump sum, the IRS requires you to spread it over time as depreciation. The net effect of depreciation is to shelter a portion of the income from your property from taxes.
Calculate your basis in the property. Your basis is your purchase price plus the cost of any closing costs or commissions that you paid at the time of the closing.
Allocate the basis between the building and the land. While you will be able to depreciate the portion of the cost that corresponds to the building, land is considered a non-depreciable asset. Work with your accountant to correctly allocate the value between the two -- if you allocate too much to land, you will limit your depreciation deduction, but if you allocate too little to the land portion of the holding, the IRS could overturn your decision on audit and leave you liable for taxes and penalties.
Enter the building portion of your basis in column C of section B of Form 4562. If your investment property is a residential property, which includes houses and apartment buildings, enter it on line 19h. If it is a commercial property, enter it on line 19i.
Enter the year and month you put it in service as an investment property, which is usually your acquisition date, in Column B to the left of its depreciable value.
Divide Column C by the recovery period in Column D and enter the result of that division in Column G. For example, if you have a $600,000 apartment building, you would divide it by 27.5 and enter $21,818 in Column G. With a $1,500,000 office building, you'd enter $38,462 in Column G.
Enter the number from Column G in the column that corresponds to that property on Line 18 of the Schedule E form.
Items you will need
- Schedule E
- Form 4562
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