Tax Depreciation

What is real estate tax depreciation?

Great question!  Well, a structure will not last forever.  You know, it depreciates over time.  Well, tax depreciation is something the IRS allows the owner of a business or income-producing property to utilize to deduct the costs of buying and improving rental or business property.

Can an owner of a primary residence use tax depreciation?Tax Depreciation

No, a primary residence cannot be depreciated?

Can the owner of land use tax depreciation?

No, land cannot be depreciated.

Is tax depreciation a positive thing?

Yes, it is sure is.  You see, there are many things you can tax deduct as the owner of a business or income-producing property (rental), such as maintenance expenses, property taxes and mortgage insurance.  These deductions can be used to offset taxable income related to the property in the year they occur.

However, tax depreciation related to the property works differently.  Rather than taking one large deduction in the year of purchase, the purchase expense is spread across the useful life of the property.  This is done under strict IRS guidelines related to tax depreciation.

Will taking a deduction reduce the owner’s cost basis?

Yes, any tax depreciation deduction taken will have the effect of reducing the owner’s cost basis in the property.  This reduced cost basis will have to be taken into consideration when the property is later sold, for capital gains tax calculations.

Here is a sample real estate license exam question about tax depreciation:

In conclusion, here is a great example of a question you are likely to see on your real estate exam related to this topic:

A tax deduction that is based upon the wear and tear that results from renting out a property is known as:

A.  Depletion
B.  Depreciation
C.  Demise
D.  Dower

Correct Answer:  B

Explanation:  The tax code permits owners of rental property to depreciate their property over some time to allow for wear and tear. Depreciation shows as an expense on their profit and loss statement, which has the effect of lowering their taxable income. Although the real property may be depreciated, land cannot.

What else can help me prepare to pass my real estate licensing exam on my first attempt?

Other tips to help you pass your real estate licensing exam on your first attempt:

Real Estate Test Taking Tips

How to Pass the Real Estate Exam

Real Estate Exam Math Made Easy

Also, check out our question of the day videos on our YouTube channel:

PassMasters Real Estate Exam Prep YouTube Channel