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Should I depreciate my rental property?

Customer Question
My rental property was never...

My rental property was never depreciated for tax purposes. I have been renting it for 15 years now. Using Turbo Tax software, how can I start depreciating it for tax purposes? What can I claim as repair cost for this property and what is consider improvement? Can I depreciate appliance such as new stove, fridges, furnace, etc.

Submitted: 5 years ago.Category: Tax
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2/13/2012
Tax Professional: Robin D., Senior Tax Advisor 4 replied 5 years ago
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 16,207
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello, and thank you for using JustAnswer.
To answer your question about the appliances, yes, you may depreciate their costs. Your cost basis in the property is generally the amount that you paid.
After determining the cost or other tax basis for the rental property as a whole, you must allocate the basis amount among the various types of property you're renting. The types of property, means things such as the land, the building itself, any furniture or appliances you provide with the rental, etc.
When you input your asset as "residential rental property" TurboTax automatically assigns the correct recovery period for depreciation. Recovery period is the assets useful life.
TurboTax figures out your depreciation for you based on your entries on the "Tell Us About This Asset/Large Purchase" screen where you are asked cost information.
TurboTax also figures out depreciation on your rental property in accordance with the IRS guidelines.

FYI - if you did not claim depreciation in the past years, you can go back three years and amend your returns to add the depreciation.

Customer: Instead of going back three years and doing amendments, can I begin depreciating this year?

Robin D: You can begin, but you may not add any past year costs on this year's return. In other words, if you bough the appliances last year (2010), then you cannot start the date for depreciation as 2011. You would need to list the correct date of starting to use it for depreciation.

Customer: I am referring to the rental property itself, such as the building.

Robin D: Yes, but that means the same thing. If you purchased (or placed into rental in 2000) then the date you placed in into actual service is your start date. This means that your remaining time to depreciate is less as you have lost those past years. When TurboTax asks for the dates, you must be exact. You cannot start the date with 2011 if you really started 15 years ago. That would allow you to run too far into the future with the depreciation.

Customer: So, if I placed the property into rental in 1994 and did not depreciate, how can I account for those years?

Robin D: You cannot now. You can only go back three years to amend. What was the reason you did not use depreciation in the past?

Customer: Someone else did the taxes. What do you suggest I do?

Robin D: Oh, I would amend the returns then continue to depreciate.

Customer: What start date would you put on the returns?

Robin D: For the building you need the date you first started using it for a rental (month, day, 1994) for the other items when purchased. TurboTax will apply depreciation based on the current percentage you are allowed.

Customer: What happens if I start depreciation as of this year?

Robin D: If you have been showing the rental (I hope) on your past returns, then a simple audit would show you are not using the correct percentage for the depreciation. This is all important when and if you sale the rental property. I know it does not seem fair, but if you do not claim depreciation, you are still required to reduce the basis of the property for the allowable depreciation of the property when reporting the sale. This generally increases gain and thus tax. Did you have another question about depreciation?

Customer: Yes, the rental was being declared on the previous year's tax returns.

Robin D: Then if you start a date NOW for depreciation of that same property it is an easy catch for any auditor. Every year has a specific percentage amount and yours would not add up. A 2011 start date on a rental property that has been used in rental on previous years is an easy audit item. Every year has a specific percentage amount and the first year of depreciation is not the same as 15 years later. This is why I said to make sure that TurboTax gets the correct beginning date so the percentage and depreciation schedule is correct.

Customer: Do you have to depreciate rental property?

Robin D: You do not have to depreciate it but as I mentioned above, when the property is sold you must recapture depreciation that was claimed or could have been claimed. So, if one does not use their depreciation then they are not using all they could plus on the sale end of it they are required to account for a lower basis and higher gain. It does no good to not use your depreciation.

Customer: If I put a 1994 start date would TurboTax do the depreciation for all the receding years?

Robin D: Yes, their system should show a depreciation schedule that takes into account the deprecation that should have been used up to year 2010. Then it shows the correct amount to claim for 2011.

Customer: How many years would a single family dwelling be depreciated over?

Robin D: 27 1/2 years for that rental single dwelling.

Customer: Would TurboTax automatically input this number? Or, do I have to manually input it?

Robin D: Yes, it will ask you questions and apply the tax law to the specifics. It should do it all for you. The appliances should be a 5 year class life.

Customer: Okay, thank you. I will give you a break now.

Robin D: Come back any time.

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