Why Rental Property Owners Need to Get Depreciation Right
Owning rental property can be a great way to build wealth, but it also comes with tax complexities. One of the most critical tax tools for property owners is depreciation. If you’re not taking depreciation correctly—or at all—you could be leaving money on the table. Worse, the IRS will assume you’ve taken depreciation when you sell the property, which can lead to higher taxes and penalties.
Let’s explore why depreciation is essential, how it impacts your taxes, and how we can help rental property owners ensure they’re maximizing their write-offs and staying compliant.
What Is Depreciation and Why Does It Matter?
Depreciation is a tax deduction that allows you to recover the cost of wear and tear on your rental property over time. For most residential rental properties, the IRS lets you depreciate the building’s value over 27.5 years.
Here’s why this matters:
Lower Taxes Today: Depreciation reduces your taxable rental income, lowering your overall tax bill.
IRS Assumptions at Sale: When you sell your property, the IRS assumes you’ve taken depreciation—whether or not you actually did—and calculates depreciation recapture tax. If you skipped depreciation, you’ll end up paying taxes on deductions you never took.
Common Depreciation Mistakes
Many rental property owners unintentionally miss out on depreciation benefits. Here are some common issues we see:
Not Taking Depreciation: Some property owners skip depreciation entirely, thinking it’s optional.
Incorrect Basis Calculation: The depreciation basis should exclude land value and focus only on the building’s cost.
Improper Classification: Improvements and repairs are often incorrectly classified, which can lead to lost deductions or IRS scrutiny.
How We Can Help Rental Property Owners
At Big Cake Tax, we specialize in helping rental property owners get depreciation right—whether it’s fixing past mistakes or optimizing current-year filings.
Here’s how we can help:
Depreciation Rebuilds: If you’ve missed depreciation deductions in previous years, we can create a comprehensive depreciation schedule and file Form 3115 to make a change in accounting method. This allows you to “catch up” on missed deductions without amending past returns.
Accurate Basis Setup: We’ll ensure your property’s depreciation basis is calculated correctly, maximizing your allowable deductions.
Tax Planning for Sales: We’ll prepare you for depreciation recapture at sale, helping you minimize its impact through strategic tax planning.
Why Getting Depreciation Right Is Critical
Failing to take depreciation is a costly mistake. For example:
Lost Deductions: You could be missing out on thousands of dollars in annual tax savings.
Higher Taxes at Sale: Depreciation recapture means the IRS will tax you on depreciation you “should have” taken—even if you didn’t.
By proactively addressing depreciation issues now, you can avoid unnecessary tax bills and ensure your property is working for you, not against you.
Let’s Get Your Depreciation Back on Track
Depreciation isn’t just a tax benefit—it’s a necessity for rental property owners. If you’ve missed deductions or aren’t sure if your depreciation is being handled correctly, we can help.
Schedule a consultation with Big Cake Tax today, and let’s ensure you’re taking full advantage of this critical tax tool. Because when it comes to your property, every dollar counts. 🍰