Owning a rental property is more than just managing tenants and collecting rent. It also involves making strategic business decisions, especially when it comes to taking advantage of attractive tax incentives for your rental property.
The government has made owning a rental property in the United States extremely attractive, thanks to favorable tax programs and rates. With the numerous operating expenses and investments, such as upgrades and renovations, landlords can deduct quite a chunk from their annual tax returns.
Depreciation is one of the more favorable tax advantages that rental owners in Southern California can take advantage of. Over the years, they can deduct a specific percentage of their investment to compensate for its depreciation over time.
However, in 2017, Bonus Depreciation was introduced, allowing landlords to deduct 100% of the cost for an improvement on their rental properties.
In this article, we will dive deeper into how bonus depreciation works and why rental property owners should jump on this opportunity as soon as possible.
Over time, properties can depreciate if not maintained. The government has decided to account for this depreciation of a real estate investment over 27.5 years for owners.
So, over the course of owning a property for 27.5 years, the property owner will successfully deduct the entire purchase of the property.
For example, if an investor purchases a rental property for $275,000, they can deduct $10,000 each year from their tax returns for 27.5 years, thanks to the depreciation determined by the IRS.
The same goes for improvements made to the property, such as appliances and landscaping. However, there are different timelines for depreciation that can go up to 20 years, depending on the improvement.
Instead of deducting the entire cost of the improvement for the year it was purchased, landlords can deduct a bit of the cost each year until they have reached the entire purchase amount.
However, this concept has changed with the introduction of bonus depreciation.
In the 2017 Tax Cuts and Jobs Act, the government introduced bonus depreciation, which allowed property owners to deduct 100% of improvement costs in one year.
So, if a landlord purchased a new washer and dryer for their rental property, they could deduct 100% of the cost during the first year of owning the appliances. However, this was only possible until the end of 2022.
The bonus depreciation incentive expires at the end of 2026. Each year, the bonus will decrease until that time.
The bonus depreciation incentive for rental properties will phase out over the next few years until it ends completely in 2026.
With each year, the percentage of initial deprecation will decrease. The schedule is set below:
| Year | Bonus Depreciation |
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
At the time that this article is written, landlords can take advantage of the 80% bonus depreciation.
While landlords can take advantage of bonus depreciation on improvements made to a rental property, they cannot use bonus depreciation for purchasing a rental property.
The tax incentive is only valid on qualifying improvements and renovations that better the property.
The actual purchase of a property still falls under the 27.5-year depreciation schedule set by the IRS. It’s important to note that only the value of the actual property, not the land it sits on, can be depreciated.
Now that we understand that the property itself does not qualify for the bonus depreciation let’s dive into the improvements that do qualify for it.
An improvement must better, adapt, or restore part of the property. In most cases, these improvements also increase the value of the property, allowing rental owners to increase rent.
Below are some examples of improvements that can qualify for bonus depreciation.
Installing new floors throughout the property or in just one room can be deducted from your tax return through bonus depreciation.
Many landlords are choosing hardwood flooring, tile, or laminate flooring as opposed to carpeting for easier cleanup and less damage from tenants.
Upgrading old appliances with new ones, especially energy-efficient appliances, qualify for bonus depreciation.
Not only will they save on electricity and your taxes, but they can increase the value and asking price when acquiring a new tenant.
If your property requires landscaping improvements or a permanent fence, the costs of these services and materials qualify for bonus depreciation.
As a landlord, your job is to ensure your tenants are safe in your property. One way to do this is by adding security technology, such as a Ring doorbell, security cameras, and electronic keypad locks to the doors.
Plus, the installation and equipment expenses qualify for bonus depreciation.
Landlords face a “now or never” situation with bonus depreciation. If this is the first time you have heard about the incentive, then it’s time to consider making improvements to your rental property as soon as possible.
In 2023, landlords can deduct 80% of their improvement expenses instantly. This rate will only decrease year after year until it expires at the end of 2026 (see above).
Save on taxes, increase property value, and maximize your ROI with bonus depreciation for rental property.
It’s no secret that the world of real estate is jam-packed with regulations, laws, and tax programs. The average landlord, and even experienced landlords, aren’t aware of all these great opportunities out there.
That’s where Scout Property Management in Oceanside, CA comes in.
We’re more than just an Oceanside property management company that takes care of your tenants, maintenance, and repairs. We take care of our owners and ensure their properties are in compliance with local regulations and that they are aware of tax incentives that can save them money and maximize their ROI year after year.
You don’t have to manage your Oceanside rental property and investment on your own. Our team of Oceanside property managers is here to simplify property management and advise you on important information and decisions.
Get a FREE rental analysis today to see how much you can rent your Oceanside property for.
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