6 Rental Property Expenses You May Not Know You Can Depreciate

Investing in a rental property is one of the keys to building long-lasting wealth. Investors not only have the capacity to generate an income without exchanging time for money but also have access to an incredible tax incentive called depreciation. Depreciation allows investors to recover the cost of long-term property held for more than a year.

Most investors are aware that the building can be depreciated over 27.5 years using the modified accelerated cost recovery system (MACRS) and that land is never depreciable; however, few are aware of that, with the help of a cost segregation study, additional components of the building can be depreciated.

Continue reading to discover the six rental property expenses that you might not know you could depreciate.

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A cost segregation study is a tool that real estate investors can use to significantly increase cash flow and reduce their overall tax burden. During a cost segregation study, the rental property assets are categorized into four categories: personal property, land improvements, building components, and land. Each asset is then assigned an appropriate property class and useful life. The useful life ranges from five to 15 years.

Property that can be depreciated in under 20 years will be eligible for bonus depreciation. This allows investors to accelerate their depreciation, thereby claiming a greater tax benefit.

Let's put the cost segregation analysis to work to learn more about which rental property expenses can be depreciated.

ALSO READ: How to Make a Depreciation Schedule: A Small Business Guide

New and used appliances placed in service in the rental property can be depreciated over a period of five years. The types of appliances that can be claimed for the purpose of depreciation include, but are not limited to, refrigerators, washing machines, dishwashers, and ovens. Rental property investors being able to depreciate appliances is a huge tax perk that also helps them maintain the aesthetic of the property.

Investors who purchase furniture (couches, bedroom sets, dinettes, etc.) for their residential rental units are eligible to claim the depreciation deduction for the expense over a period of five years. This is a perfect deduction for vacation rental hosts, investors in student housing, and any other landlord who provides tenants with fully furnished housing.

Savvy investors can depreciate the cost of carpet over five years, so long as certain conditions are met. To claim depreciation for carpet, the carpet must be tacked down to the floor. If the investor happens to make the mistake of gluing the carpet down instead, it is considered to be part of the structure and must be depreciated over 27.5 years.

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Many investors purchase rental property that already contains countertop and cabinets, and they may not be aware that the cost of existing countertops (as well as other tangible assets) can be depreciated. To do this, the actual industry price of the property needs to be determined, then that price can be depreciated over its useful life.

If you are an investor who is having a fence installed or has had one installed, then you will be surprised to know that depreciation can be claimed on the cost of the fence. Depending on the depreciation system the investor used, the cost of a fence can be depreciated over a period of 15 or 20 years. If eligible for the 15-year period, the 100% bonus depreciation can claimed.

ALSO READ: A Small Business Guide to Bonus Depreciation

Many rental properties are equipped with old and outdated air-conditioning units. Investors are often saddled with the cost of updating these units, but thankfully the tax code allows investors to depreciate this cost. Air-conditioning units are five-year property, meaning that investors can recover the cost of an updated air-conditioning unit over a period of five years.

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Claiming depreciation on components of property is a huge perk of being a rental property owner. With careful tax planning and the use of a cost segregation study, you can increase your cash flow and maximize your tax benefits exponentially.

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