Identify depreciable property
Land is not depreciable. Buildings and qualifying improvements may be depreciable when they are owned, used in an income-producing activity, expected to last more than one year, and placed in service.
Residential rental real estate placed in service under current general rules is commonly recovered over 27.5 years using the straight-line method and mid-month convention. Appliances, furniture, land improvements, and other assets may have different classes and conventions.
Establish basis and placed-in-service date
Begin with cost or another applicable basis, add capitalizable acquisition costs and improvements, and allocate the total between land and depreciable property. The placed-in-service date is when the property is ready and available for rent, not necessarily the closing date or first rent receipt.
Converted personal property requires special basis rules. Refinancing does not normally reset the building's basis, while later improvements generally have their own basis and recovery schedule.
Maintain a schedule for every asset
A depreciation schedule should identify the asset, property, cost basis, land exclusion, placed-in-service date, method, recovery period, current deduction, accumulated depreciation, and remaining basis.
Tax depreciation can involve elections, bonus depreciation, Section 179, alternative systems, and convention rules. Use current tax guidance and professional review rather than assuming a simple monthly book schedule equals the tax return.
Accounting examples
Example: basic building allocation
A $300,000 purchase is allocated $60,000 to land and $240,000 to the residential building.
| Account or treatment | Debit | Credit |
|---|---|---|
| Land basis | $60,000 | |
| Depreciable building basis | $240,000 | |
| Full-year straight-line illustration | $240,000 / 27.5 |
Actual first- and final-year tax depreciation depends on the applicable convention and current law.
Sources and limitations
This guide provides general educational information for US rental owners. Accounting and tax treatment depends on your facts, accounting method, entity, current law, and professional judgment. State and local rules may impose additional requirements. This is not tax, legal, accounting, financial, or investment advice.
- Publication 527, Residential Rental PropertyInternal Revenue Service
- Publication 946, How To Depreciate PropertyInternal Revenue Service
- Publication 551, Basis of AssetsInternal Revenue Service
RentalBooks
How RentalBooks can help
RentalBooks can maintain straight-line monthly book schedules and journal postings for property and unit assets after you establish the appropriate accounting assumptions.
- Track asset cost basis, class, scope, and placed-in-service date.
- Create linked asset, accumulated-depreciation, and depreciation-expense accounts.
- Post traceable monthly book depreciation entries.