Depreciation is a non-cash expense that allows investors to deduct a portion of the property's purchase price (excluding land value) from their taxable income each year. The IRS mandates that residential rental property be depreciated over 27.5 years. This tax shelter allows investors to report a 'paper loss' on their taxes while the property may actually be generating positive cash flow.
How It Applies to Florida Landlords
For Florida landlords, depreciation is one of the most powerful tax benefits available. Even as Florida property values rise, the ability to depreciate the building structure provides a significant annual tax shield. However, when you sell, the IRS will 'recapture' this depreciation, taxing it at up to 25%. Landlords must factor this potential recapture into their long-term exit strategy.
Key Takeaways
- Residential rental property is depreciated over 27.5 years.
- Land value cannot be depreciated.
- It reduces taxable income annually.
- Depreciation recapture is taxed upon sale, necessitating careful exit planning.