Skip to content

John Harman, CPA PLLC

Rental Properites

Contact Us (469) 742-0283

Buying Rental Property – Depreciation = Tax Savings

Owning Rental Property is Good for Investors - Offering Great Tax Benefits

As a McKinney business accountant I find that one investment a lot of my clients are considering is rental property. I recommend to anyone considering rental property, to do their homework first. Once you’ve decided on rental property as a business, I suggest you consider meeting with me to form a Sub S corporation, but that’s another discussion. As a business tax planner I work with clients to find every legitimate tax deduction that’s possible, and one of the biggest and most beneficial deductions for rental property is depreciation.  

Depreciation is a great tax incentive that helps fuel the supply of rental properties. In simple terms, you’re buying property as an investment and charging rent to those who can’t afford to buy or who decide not to buy a home. Depreciation is a significant tax benefit, but the IRS requires that certain requirements must be met:

1. You must own the property.
2. You must use the property in business or in an income-producing activity.
3. The property must have a determinable useful life of more than one year.

Depreciating Residential and Commercial Property

If you have decided to focus on investing in residential rental property, you must depreciate the property over a 27.5-year period. Should your niche be investing in commercial rental property, the depreciation must be taken over a 39-year period. Whether residential or commercial, each year you are allowed a tax deduction for a portion of the property's value that appears as a line item on Schedule E of his tax return. This is treated as another expense which reduces the amount of rental income flowing through your 1040. When you reduce your expenses, including depreciation from your gross rental income, the result is net rental income close to zero. In simple terms, little if any tax is due on the rental income. At John Harman CPA we also remind our clients about the depreciation they can take on any capital improvements made to the property.

Without these tax deductions, you, like many others would be less motivated to invest in rental property. If this was the case, then renters would find it increasingly difficult to obtain affordable housing caused by the decrease in supply. As a consequence of this, rent would be driven higher and could possibly result in a rise in homelessness.

Government and Free Enterprise

Presently we live with an economy that is saddled with record deficits and debt, and the government is seeking with all its power to eliminate certain deductions under the guise of generating additional tax revenue to boost jobs and growth. The good news is that it doesn’t appear that the current administration will eliminate the depreciation deduction for rental property. You can imagine what would happen if this deduction was removed. The housing market rebound we’re seeing now would deteriorate, prices would drop and the number of rental properties would decline. The cause and effect of this would catapult rental prices higher and higher and the economic fallout could be severe.

A rental property business, like any other small business requires proper tax planning and financial guidance to ensure that you benefit every year you’re in business. John Harman CPA is qualified to assist you with your tax, financial, and insurance planning. Our team of trusted advisors is available to make sure you don’t take any wrong turns. Call us today at 469-742-0283 and we’ll invest the time together to cover all your options.