When it’s time to file your rental property taxes, depreciation is one of many things on your mind.
However, if you don’t fully understand how depreciation deductions work, you could miss out on the many key benefits you’ll gain by using tax strategies.
Depreciation is the gradual decline in value of your properties – the buildings, their components, and the property inside them.
The IRS allows you to take several key tax write-offs for your long-term property. These are called depreciation deductions, and they help you recover the cost of your property over time. In some cases, you can use accelerated depreciation to recover those costs even faster.
This is the purpose of Section 179 of the tax code. By understanding Section 179 deductions and how to apply them, you can save hundreds of dollars on taxes every year.
Here’s how to take advantage of this key tax deduction next tax season.
What is Section 179?
Section 179 is the part of the tax code pertaining to personal property. Personal property is any long-term capital asset such as a car, piece of equipment, or electronic device. These capital assets are typically depreciated over three to five years.
However, Section 179 allows for accelerated depreciation of most personal property. Why is this important? Section 179 expensing recovers the same cost that you would with regular depreciation, but in a much shorter timeframe. Instead of waiting three to five years to fully recover the cost of your property, you can recover the full cost within one year. This gives you access to more funds in the short-term, which you can then reinvest in your rentals to generate larger profit margins.
Section 179 expensing, therefore, fuels the positive feedback loop that will help your business grow and prosper in the long term.
Deducting Personal Property with Section 179
Section 179 is an advantageous tax strategy for almost all landlords. However, there are some requirements and criteria.
To use the Section 179 deduction, you must meet the following criteria:
- You can’t deduct more than your net taxable income in one year. In other words, your total deductions can’t result in a net loss for your business.
- You must be classified as a rental business owner according to the IRS. The other possible classifications are passive investor and not-for-profit owner.
- You must use your property for your rental activities more than 50% of the time.
- You may not exceed the $1,050,000 yearly deduction limit.
If you meet these criteria, you can elect to apply Section 179 expensing on IRS Form 4562.
Alternatives: Bonus Depreciation
The criteria for Section 179 expensing are quite stringent. If you don’t meet these criteria, another way to use accelerated depreciation is through bonus depreciation. Bonus depreciation involves a similar concept but has different requirements.
Here’s how bonus depreciation works: You can fully deduct any personal property within one year if it meets these criteria:
- It has a useful life of 20 years or less
- It isn’t part of an inheritance or gift
- You use it for your rental activities more than 50% of the time for listed property.
If your property qualifies for both bonus depreciation and Section 178 expensing, which one should you use? Section 179 expensing has more criteria, but it also allows you more flexibility. This is because bonus depreciation applies class-wide: if you use it for one item, you must use it for all similar items in that class. If you want more control over how your property is deducted, Section 179 is a safer bet.
Tax Tips for Maximizing Your Deductions
Here are a few tips for maximizing your deductions next tax season:
- Know which deductions are available. You’ll miss out on the savings if you don’t know to apply them.
- Keep detailed records. In case of an IRS audit, you’ll already have detailed proof that you deserve the deduction you claimed.
- When in doubt, enlist the help of a tax professional. No landlord fully understands all there is to know about rental property taxes. Plus, the IRS’s rules often change over the years. It’s better to be safe than sorry and invest in professional guidance.
Section 179 expensing is just one way to save money this tax season. However, there are dozens of other deductions available if you know about them. By researching tax deductions and strategies before next spring, you’ll be prepared to tackle your rental property taxes when it’s time.