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Thursday, January 29, 2015

How Can I Receive Rental Property Tax Deductions for Depreciation

Rental Property Tax Deductions

Do you rent property to others? 

You must report the rent as income on your taxes. You can deduct, or subtract, your rental expenses (money you spent in your actions as the owner renting out the property) from that rental income, reducing your tax obligation.

Many expenses can be deducted in the tax year you spend the money but depreciation is calculated differently.

What Is Depreciation

A Brief Overview of Depreciation from

"Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable.

In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the following requirements:

The taxpayer must own the property. Taxpayers may also depreciate any capital improvements for property the taxpayer leases.

A taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based only on the business use of that property.

The property must have a determinable useful life of more than one year."

Depreciation Definition Examples

"1.Accounting: The gradual conversion of the cost of a tangible capital asset or fixed asset into an operational expense (called depreciation expense) over the asset's estimated useful life.

The objectives of computing depreciation are to (1) reflect reduction in the book value of the asset due to obsolescence or wear and tear, (2) spread a large expenditure (purchase price of the asset) proportionately over a fixed period to match revenue received from it, and (3) reduce the taxable income by charging the amount of depreciation against the company's total income. In effect, charging of depreciation means the recovery of invested capital, by gradual sale of the asset over the years during which output or services are received from it. Depreciation is computed at the end of an accounting period (usually a year), using a method best suited to the particular asset. When applied to intangible assets, the preferred term is amortization.

2.Commerce: The decline in the market value of an asset.

3.Economics: The decrease in the economic potential of an asset over its productive or useful life.

4.Foreign exchange: The reduction in the exchange value of a currency, either by a government or due to weakening of the underlying economy in a floating exchange rate system."
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