Investing in rental properties can be a lucrative venture, especially when it comes to tax benefits. One key aspect of this is depreciation—a method used to deduct the costs of a rental property over time. However, property owners may wonder whether it's possible to change the depreciation method they initially selected. This article examines the intricacies of changing the depreciation method for rental properties, exploring the reasons why one might consider it, the processes involved, and the implications of making such a change.
Before delving into the possibility of changing the depreciation method, it’s essential to understand what depreciation is and how it works in the context of rental properties.
Depreciation is an accounting method that allows property owners to allocate the cost of a tangible asset over its useful life. For rental properties, the IRS permits owners to deduct the cost of the property (excluding land) over a specified period—typically 27.5 years for residential properties and 39 years for commercial properties.
There are several methods of depreciation, but the two most commonly used for rental properties are:
There are several reasons a property owner might consider changing their depreciation method:
Yes, it is possible to change the depreciation method for your rental property, but there are specific guidelines and processes that must be followed to do so legally.
The IRS allows for a change in the depreciation method, but it requires filing aForm 3115 (Application for Change in Accounting Method). This form is essential for reporting changes in accounting methods and must be filed with the tax return for the year in which the change is made.
Changing the depreciation method can have far-reaching implications for a property owner’s tax situation.
When switching depreciation methods, property owners must consider the potential tax consequences, including:
Changing the depreciation method necessitates meticulous record-keeping. Property owners must ensure compliance with IRS regulations and maintain accurate documentation of both the old and new methods of depreciation.
As tax laws and regulations continue to evolve, staying informed and proactive about your property’s depreciation strategy is essential in maximizing the benefits associated with rental property investments.