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Calculating Depreciation on a Foreign Rental Property

Do you own a rental property outside the United States that you put into service after 2017? If you do, are you taking a depreciation expense for this rental property? If so, due to tax law changes as a result of the Tax Cuts and Jobs Act (TCJA) of 2017, you might be leaving money on the table. How so?

Previously, which is to say, in tax years 2017 and prior, if you were operating a foreign rental property, you would depreciate the property over 40 years (as opposed to 27.5 years for properties in the United States) using the alternative depreciation system. However, if you placed a foreign rental property into service in 2018 or later, you would need to depreciate the property over 30 years instead of 40.

Why does this matter? Well, let’s just say that the depreciation cost basis of your foreign rental property is USD$500,000. If you were to depreciate it over 40 years using the old method, your annual depreciation expense would come out to $12,500 per year. However, if you were to depreciate it over 30 years, your annual depreciation expense would come out to $16,666 per year. That’s more than a $4,000 benefit to you, each year. Over 10 years, that would be more than $40,000 in depreciation expense you could be losing.

But really, why does this matter? Because one of the biggest benefits to owning a rental property is that often times, after accounting for depreciation expense, the property shows a loss on paper, even if it is cash flow positive in actuality. Being able to take a loss on paper on a cash-flow positive asset has obvious tax benefits, since you are able to offset passive income with passive losses.

We often see tax preparers who make the mistake of depreciating a foreign rental property placed into service in 2018 or later, over 40 years instead of 30 years. Therefore, with the tax year 2019 deadline crashing around the corner, now might be as good a time as any for you to look into whether you have been depreciating your foreign rental property correctly. Indeed, if you are a rental property owner and feel that your foreign rental property hasn’t been depreciated correctly, contact us today for a no-obligation review of your rental property and tax return.