Once you’ve determined the applicable MACRS system and recovery period, the next step is to calculate the annual depreciation amount. Under GDS, the depreciation rate is a consistent 3.636% per year for properties in service for a full year. This percentage is derived from dividing 1 by 27.5 years.
For properties placed in service mid-year, the IRS provides a table with specific percentages based on the month the property was put into service. These percentages reflect the mid-month convention, assuming the property was placed in service in the middle of the month.
Determining Cost Basis Your depreciation calculations hinge on the “cost basis” of your property. This includes the purchase price plus any associated costs, such as settlement fees, legal fees, and improvements. However, the basis can be reduced by certain payments, like insurance reimbursements for property damage or proceeds from granting an easement.
Depreciation Duration Depreciation continues until you have fully deducted the property’s cost basis or the property is removed from service. Removal from service can occur if you sell the property, it’s destroyed, or you cease renting it.
For a deeper dive into the rules governing property depreciation, refer to IRS Pub. 946 , which provides comprehensive guidance on the subject.
Rental property depreciation is detail-heavy—meticulous attention to the IRS guidelines is essential.