You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost on the tax return each year.
Three basic factors determine how much depreciation you can deduct. They are: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense.
You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. taxmap/pub17/p17-048.htm#en_us_publink1000171740
You should claim the correct amount of depreciation each tax year. Even if you did not claim depreciation that you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted.
If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U.S Individual Income Tax Return. If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information.taxmap/pub17/p17-048.htm#en_us_publink1000171741
To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. In some instances, that consent is automatic. For more information, see chapter 1 of Publication 946. taxmap/pub17/p17-048.htm#en_us_publink1000171742
You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. taxmap/pub17/p17-048.htm#en_us_publink1000171743
See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation.taxmap/pub17/p17-048.htm#en_us_publink1000171744
In addition to the rules about what methods you can use, there are other rules you should be aware of with respect to depreciable property.taxmap/pub17/p17-048.htm#en_us_publink1000171745
If you dispose of depreciable property at a gain, you may have to report, as ordinary income, all or part of the gain. See Publication 544, Sales and Other Dispositions of Assets. taxmap/pub17/p17-048.htm#en_us_publink1000171746
If you use accelerated depreciation, you may have to file Form 6251. Accelerated depreciation can be determined under MACRS, ACRS, and any other method that allows you to deduct more depreciation than you could deduct using a straight line method.