Author Topic: Can you explain to me how to calculate depreciation on my rental like I'm 5?  (Read 1172 times)

rentalnewbie

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I need to do my taxes. I have always done my own with the aid of software (usually turbotax) and I would like to do so again. However, I am not sure how to do the 27.5 year straight-line depreciation calculation for my rental. I did it last year and I'm concerned I did it wrong...

I am planning to use turbotax "premier" which includes rental income and expenses. However, I did this last year and from what I recall it didn't tell me how to calculate the depreciation, I had to figure it out on my own and enter it in the box for it.

This is what I did last year:
- I looked up the appraisal for the house and checked how much of that was land value.
- I calculated how much of the appraised amount the land value was of the total appraised value as a percentage
- I looked at what I paid for the house when I bought it and deducted the percentage for land
- I divided what I got by 27.5 years and claimed the resulting amount as my year 1 depreciation

So let's say 25% of the house's value on the appraisal was attributed to land and I paid 100,0000 for the house, that would mean the improvements were 75,000. I'd take 75,000/27.5 = $2727.27 per year in depreciation for the first 27 years of ownership.

Yes? Yes? Maybe?

Should I:
1) Throw myself on the mercy of a CPA
2) I'm sort of on the right track, maybe I should get the turbotax that includes CPA/EA help online ($180 vs $80 for the rental included plan)
3) I'm doing it in an acceptable manner and I can proceed with my $80 turbotax version

dleavitt

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Unless your rental was placed in service January 1 (or close to it), you probably took too much depreciation in year 1, and you will take too little in year 28.  However, for the next 26 years you should be fine with your number.

Otherwise I think you did good.  And personally, I wouldn't worry about amending for the prior year error.

MaikoTsumi

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TurboTax premier handles depreciation very well and easily, so you wouldn't need to pay extra.  Land value you need to get from your county tax assessor. Appraisal should have got it from there, but I'd go with the source for that.

rentalnewbie

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Thanks deleavitt and MaikoTsumi.

Really I'm most concerned about if I am doing the land value correctly otherwise it's not too tough...MaikTsumi, I got the land value from my tax appraisal but I was worried I wasn't scaling it correctly to my purchase price. My tax appraisal is only done every 8 years and is not anywhere close to what I paid for the house, which from my understanding is what my depreciation is based on. I did not find turbotax premier to be very helpful with this issue but possibly it's just me.

SeattleCPA

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So you're making a couple of mistakes probably.

First, residential real estate is depreciated over 27.5 years, but you use a mid-month convention... so you get a half month of depreciation for the first month.. and then a full month after that. (If you get the placed into service date right, TurboTax will surely handle this right for you.)

Second, probably you would segregate the costs a bit. Some of what you are renting isn't residential real estate: appliances, possibly furniture, etc. This stuff gets depreciated over shorter lives and you use a mid-month or mid-quarter convention depending on the facts. To use your example, you maybe shouldn't depreciate $75K as residential real estate but rather only $70K... and then another $2K of appliances... and then $3K of furniture. If you break out the costs right and get the dates entered, TurboTax should also handle this correctly.

I will say, though, depreciation is one thing that people often bungle with TurboTax. (The other is carrying forward the passive losses that get suspended.)

rentalnewbie

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So you're making a couple of mistakes probably.

First, residential real estate is depreciated over 27.5 years, but you use a mid-month convention... so you get a half month of depreciation for the first month.. and then a full month after that. (If you get the placed into service date right, TurboTax will surely handle this right for you.)

Second, probably you would segregate the costs a bit. Some of what you are renting isn't residential real estate: appliances, possibly furniture, etc. This stuff gets depreciated over shorter lives and you use a mid-month or mid-quarter convention depending on the facts. To use your example, you maybe shouldn't depreciate $75K as residential real estate but rather only $70K... and then another $2K of appliances... and then $3K of furniture. If you break out the costs right and get the dates entered, TurboTax should also handle this correctly.

I will say, though, depreciation is one thing that people often bungle with TurboTax. (The other is carrying forward the passive losses that get suspended.)

SeattleCPA, all of the appliances were in the house when I bought them. Would I still depreciate them as you indicated? I have no idea how hold they are, I would imagine most are past their depreciation life-span. What you are saying makes complete sense to me if I bought a new appliance, it would have it's own depreciation schedule but seems strange for ones that were included in the purchase of the house.

But I also don't know what I'm doing.

I don't recall being asked these questions by "rental" turbotax, do you think it would be worth it to upgrade the fancy $180 version?

Thank you for your help & feedback.

braje

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Right or wrong when we bought our rental condo, it never dawn on me to split out the appliances. As I replace the items I start depreciating that item. Example a couple of years ago the water heater was replaced and started depreciating at the start of service. Also I use the desktop deluxe version of TurboTax.