How to Calculate the Depreciation on Rental Property

>> December 2, 2012


There are two benefits of calculating depreciation on the rental property. One is, it will decrease your total taxable income. Second is, you can make plan of repair or new improvement after lapse of active life of property. So, if you want to get above two benefits, you should calculate the depreciation on your rental property.


There are lots of tool which can calculate the depreciation, if you will add the information of the value of your rental property and active life. So, today will teach you the steps to calculate if you have to calculate manually.

Steps to Calculate Depreciation on Rental Property:

1st Step : To Calculate Rented Property Area

You can depreciate the property which is given for rent. You can not depreciate your personal property for your income tax purpose. Measure the area which being used for your renting business. For example, it may be 50% or 60% or any % of total area. It is helpful for calculating the cost of your rental property.

2nd Step : To Calculate the Cost of Building

We calculate the depreciation on the structure of building not on land of building. If you have total cost of property including the land, you should deduct the cost of land. If you have done any improvement before giving it on rent, you will add in it. You will calculate the cost of rental property on the basis of rental area which we have calculated in first step.

3rd Step : To Calculate Annual Depreciation 

There are different system and methods of calculating depreciation in different country. In India, we use diminishing method of calculating depreciation with 10% rate or any updated rate by income tax department. In other country, it is calculated with straight line method and on the basis of the active life of rental property. Generally, we divide the cost of rental property with 27.5 years.

Example : Suppose, we have duplex and its cost is $ 3,15,000. Half of this, we are using for personal use and half for rent.Total cost of land which is used, is $ 2,00,000. Total improvement cost is $ 15,000. Now, will calculate its annual depreciation with following way.

 Rental Property Depreciation Calculation
    In Dollar
Total Cost of Property   315000
     
Less Cost of Land 200000  
Less Cost of Improvement before place in service 15000  
   
- 215000
    100000
Less Cost of Property for Personal Use (50% of total area) 50,000
-50000
Cost of Rental Property   50000

   Annual Depreciation = 50,000 / 27.5 = $ 1818.18






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3 comments:

Enayath December 3, 2012 at 9:03 PM  

Thankyou for your guidelines!

optimia dev January 4, 2014 at 9:26 PM  

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Santosh seo January 22, 2014 at 9:41 PM  

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