What Is Rental Property Depreciation?

  • Author: Devin Henry
  • Last Updated: February 8, 2023
Table of Contents

Understanding rental property depreciation is crucial before including real estate in your investment portfolio. Many income property owners get excited about the revenue streams they’ll have coming in, but they might not stop to consider how that property will be valued over its lifespan. That valuation can make or break a real estate investment, because it impacts everything from how much you can charge for rent to your income and property taxes and beyond.

The bad news about rental property depreciation is this: It begins immediately when a property starts being used as a rental and continues throughout its lifespan, much the way a new car depreciates in value the longer you have it. The good news is that rental property depreciation also has upsides.

This quick guide will help you ensure you’re making the most of your rental property’s valuation.

How Rental Property Depreciation Ties to Tax Relief

Investing in rental property can be exciting at the beginning. You’ve purchased something that will bring you additional income, and you’re ready to line up a tenant to see that extra money roll in. The thing people often don’t realize is that the value of the property will dwindle over time, which has a significant impact on your taxes.

You first need to determine how much the value of the property has declined to manage those taxes, which can be done by measuring carrying value against the original cost. You can then lower your taxable income by deducting the cost of purchasing and improving the property over its useful life ― and that includes from both income generated and taxes. This helps landlords maintain their properties’ profitability over time by helping them avoid losses incurred from paying high taxes on properties that have depreciated.

The tax benefits are enormous here, too, since you can deduct the amounts you pay for repairs, maintenance, mortgage, insurance, and other expenses incurred in property management. Knowing the depreciation value will significantly help in keeping these deductions and costs accurate when it comes time to file.

Understanding Real Estate Depreciation

A lot goes into determining how much a rental property has depreciated since you purchased it, but understanding the factors involved in that calculation can go a long way toward making sure you’re maximizing your investment.

Why Calculate Rental Property Depreciation

Calculating rental property depreciation helps in claiming income tax deduction and lowers your overall tax payment for the amount of rent collected in a year. There are several things that go into these calculations, however, including that the initial costs might go up depending on repairs required before you can allow tenants to rent the property. Wear and tear often requires certain items like floors, appliances, and windows to be replaced over time, for example.

Calculating the depreciation value will help you claim these repair and upkeep costs in terms of income tax value. This will save you from incurring extra expenses that exceed the amount you spent purchasing the rental property. Some property owners even hire appraisers to help them determine the actual value of a given property.

What Does Property Depreciation Entail?

What is Rental Property Depreciation?

Property depreciation encompasses various facets of the property’s fundamental value, including fixtures and fittings that will need to be evaluated before calculating the rental property’s actual depreciation. The cost of repairs may affect the property’s general rental income revenue if not factored into the initial purchase price, for example.

The depreciation value of a house is determined by calculating the house’s value at the rate of 2.5% from the date of construction. Using a depreciation value of 2.5% per year for a property that was constructed in the year 2000 at the price of $200,000 and purchased at $500,000, you can claim up to $5,000 per year in depreciation value.

Knowing this calculation will help you make a profit from rental income, and help you grow net income value of your rental property.

Passive Income Loss Deductions

You might collect huge revenue from your rental property, but you also might end up sinking into tax losses without knowing it. The Internal Revenue Service (IRS) offers myriad guidelines about how property owners can benefit from the passive income generated from a rental property. Passive income is income that requires very little effort to earn or maintain, and it is maximized by understanding your property’s value up front.

The IRS will compensate you for possible losses incurred in running your rental business if you adjust the value of income generated from rental property to slightly below $100,000, for example. This indicates you can claim up to $25,000 dollars in generated passive rental property income against your regular income. It is thus wise to conduct a thorough evaluation of the rental property you intend to acquire before you purchase the property.

Learn More About Rental Property Depreciation

If you are planning to buy an income property in Washington, D.C., Virginia, or Maryland, consider obtaining the assistance of an experienced property management company to help you navigate the process. Depreciation and rental property laws are complicated, but working with a team of experts who are well-versed in their nuances will save you from significant losses in rental income revenue. 

If you have any questions about depreciation ― or anything else related to property management ― contact Nomadic Real Estate. Let us provide you with the help you need, resources you can trust, and the expertise you can count on.

Share via Email
Share on Facebook
Share on LinkedIn
Share on Twitter
Get help from DC's top real estate team.
Founded in 2005, Nomadic is the go-to full service real estate firm in the DMV. We've helped thousands of landlords, investors, and residents and we would love to connect with you next.
Get in touch today!

Check out more of our blog posts below!

Or search for a different topic:
2018 Inc. 5000 List
Voted Best Property Manager in DC Badge
Top Company Cultures Award Best Company 2018
Equal Opportunity Housing

Navigate

Resources

Join Our Newsletter!

We promise we won’t spam you – you can unsubscribe at any time.

Contact Us

Copyright © 2023 Nomadic Real Estate. Sitemap.

Facebook-f Instagram Twitter Youtube
Scroll to Top

Thinking of selling? Get an instant property value report:

Download Sales Comps

Enhanced Reporting

Your portal includes a selection of extremely useful reports. Reports are available in the “Reports” section, and are distinct from the financial statements. Unlike financial statements which are static records, Reports are dynamic real-time records that will update with current data every time you view them. 

Scroll down to learn more about Reports:

Navigate to the "Reports" module in your portal:

Owner Portal Reports
  • Keep in mind, these reports are dynamic records. They will refresh to display current information every time you view them. 

Enhanced Rent Roll Report:

Enhanced Rent Roll Report
  • The Enhanced Rent Roll Report will show the rent amount, last payment date, move-in date, lease expiration date, and security deposit amount for each of your tenants. 
  • It will also show a portfolio summary with occupancy percentage, vacancy loss, and more!

Unit Comparison Report:

Unit Comparison Report
  • If you own multiple units (or buildings) with Nomadic, you’ll get access to the Unit Comparison Report. 
  • This report enables you to quickly compare financial performance between your units at a glance without toggling between individual reports. 

Income Statement Month-Over-Month:

Income Statement by Month Report
  • The Income Statement Detail – Monthly Report serves as a month-over-month record of portfolio performance. You’ll see itemized income and expense categories and can track monthly. This report will update with fresh data every time you view it. 

Financial Statements

Financial statements will be published to your portal on a monthly basis. The statements are found in your Documents library, and provide a historical record of all financial performance. The statements serve as a snapshot of financial performance over a given period, and are static documents (unlike Reports, the statements do not update/change in real-time). 

Scroll down for more info about the Financial Statements in your Documents library:

The Documents area contains monthly financial statements:

Owner Portal Documents
  • The statements in the Documents are are static documents. They are posted to the portal once a month to serve as a historical record of financial performance. 

Download a statement to see month and YTD financials:

Owner Portal Property Statement

You'll also find a month-over-month operating statement:

Month over Month Statement

Portal Communication Tool

You can use your owner portal to communicate with our team. Any messages you send through the portal will go straight to your Account Manager. When we reply, you’ll get an email notification and you’ll also see the message in your portal next time you log in. 

Here’s an overview of using the communication platform:

Click "Communications" and navigate to "Conversations":

Commincation Dashboard Screenshot
  • The communications module will contain a record of all messages that you create through the portal. 

Click the "New Message" button and send your message:

Owner Portal New Message Screenshot

Responses will show up in the conversation ticket:

Portal Conversation Response Screenshot
  • You’ll get an email notification whenever you get a response, and you’ll also see the message in your portal next time you log in. 

You can reply in-line using the comment box:

Owner Portal Comment

Each conversation will be logged in its entirety:

Portal Conversation Snapshot

Understanding the Ledger

Your portal includes a ledger with all transactions. The ledger is populated with data in real-time as transactions flow through our accounting software. Much of this information is also available in the Reports area, as well as the Statements in your Documents library, but the ledger is the most comprehensive resource for diving into the details. 

Please scroll through the sections below to get a better understanding of how to interpret the ledger. 

By default, transactions are sorted chronologically:

Owner Ledger Dates
  • The date reflected in the lefthand column is the actual transaction date, not the “bill date”. This is the date the transaction was actually processed. 

If you have multiple properties with Nomadic, you'll see the address for each transaction in the "Location" column:

Ledger Property Column
  • You can filter the ledger to look at just one property, all properties, or specific sets of properties. 
  • If you only have one property with us, you’ll just see the ledger for that property. 

The Description column displays the transaction type:

Owner Ledger Description Column
  • BILL: this is an expense transaction, such as for repair costs or management fees.
  • CHARGE: this is a transaction  billed to the tenant, most typically a rent payment. 
  • NACHA EXPORT: this is a credit we processed to your distribution account. This type of transaction is how you get paid! 

The Amount column shows the dollar value of each transaction:

Owner Ledger Amount Column
  • Positive Amounts: if an amount is positive, it reflects a transaction that is payable to you. Typically, this will be a rent payment that we collected from your tenants. On occasion, a positive number could also signify a journal entry or credit adjustment. 
  • Negative Amounts:  if an amount is negative, this is a transaction that is either payable to Nomadic or is an amount that has already been paid to you. Typically this will be for repair costs or management/leasing fees. Owner draws (net distributions into your checking/savings account) also reflect as negative amounts, since they have already been paid to you. 

The Account Balance column shows a sum of positive/negative transactions at a given point in time:

Owner Ledger Account Balance Column
  • Account Balance should always equal zero after a net distribution has been processed. When the balance is zero, this means that all expenses have been paid and you’ve received the remainder as net operating income, leaving a balance of zero (meaning: no one is due any money, as all funds have been distributed appropriately). 

Navigating the Propertyware Owner Portal

Your portal includes some extremely useful features that help you understand your property’s financial performance at a new level, with real-time transparency into every transaction.

Scroll through the snapshots below for an overview of portal navigation! If you need more help or have specific questions about using the portal, you can reach out to your Account Manager any time for a screen share. 

You can filter all info by date range or property:

PW Portal Filters

View a snapshot of income and expenses on your dashboard:

PW Owner Dashboard View

See every transaction in real-time on your ledger:

Owner Portal Ledger View

Statements and forms will be posted to your documents library:

Owner Portal Document Library

View a suite of real-time financial reports:

Portal Reports View

See a running list of all bills, and drill down for more detail:

Owner Portal Bills View

Under Bill Details, you'll find dates/descriptions/amounts and more:

Portal Bill Details

You can also communicate with your Account Manager through the portal:

Owner Portal Communication Tools

How do net distributions work?

Net distributions keep your accounting clean and simple. Each month we’ll collect rent from the tenants, deduct any repair expenses for the previous month and any management/leasing fees for the current month, and credit the remaining net operating income to your account. 

Net Distribution

You’ll receive a statement via email each time a net distribution is processed, and can view all transaction details in your Propertyware owner portal.