What Is Depreciation?
Depreciation is a method used to determine how much of the assets (e.g. your home) value has been used up. For Airbnb rental owners, the cost of buying or improving your home can be depreciated. Depreciating these assets in accordance with the rules from the IRS will allow you to claim portion of the cost as a deduction on your taxes each year.
It is important to note that these depreciation rules only apply if you own your home. According to the IRS, the property must not be rented or borrowed from someone that is not you. You must also be able to determine a definable useful life for your home, which is the amount of time that the property will be viable for business, and this useful life must be longer than one year.
When Does Depreciation Begin and End?
The depreciation of the property should begin when your home has been placed in service, which means when your home is ready and available for use. When you place your home for use as an Airbnb rental, you can begin to depreciate your property. For example, let's assume that you put your home on Airbnb in mid December 2015, but it didn't rent it out until Jan 3rd. You may begin to depreciate your property as of December.
You must stop depreciating your home when you have either recovered the full cost or when the property is retired from being in service as an AirBnB rental. Whichever event occurs first.
Report Deductions Via IRS Form 4562
If you plan to claim any depreciation deductions, these deductions will be reported on IRS Form 4562, Depreciation and Amortization. The number of deductions you are allowed depends on type of property. Make sure that you keep copies of all of the Form 4562's that you've filed in recent years so that you can keep track of your prior deductions.
Deductions on Assets Purchased Solely for Your AirBnB Business
For assets that you have purchased solely for the purpose of your AirBnB business, you may be able to use the Section 179 deduction, which allows you to take the full deduction for that asset in the first year, rather than over the life of the property.
What Rental Property Cannot Be Depreciated?
You cannot depreciate the cost of land because land generally does not wear out or get used up. In addition, you cannot depreciate property that has been put into service and taken out of service during the same year. There are certain types of property that you may not take a deduction for, such as air conditioning or heating units, swimming pools, paved parking areas, and solar energy equipment. The complete list of property that is exempted can be found here.
If you have any further questions or concerns regarding depreciating your Airbnb property, please feel free to contact us.