Are there limits on the amount of rental property depreciation that can be claimed annually?
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Yes, there are limits on the amount of rental property depreciation that can be claimed annually, but the nature and application of these limits depend on the type of property, the taxpayer’s use of the property, and the taxpayer’s overall tax situation. Below is a comprehensive explanation of the relevant legal details, including the main types of limits that may apply:
1. Depreciation Calculation Limits (MACRS Rules)
For most rental property, depreciation is calculated under the Modified Accelerated Cost Recovery System (MACRS). The annual depreciation deduction is determined by the property’s basis, recovery period, and the applicable depreciation method and convention. For residential rental property, the recovery period is 27.5 years and the straight-line method with the mid-month convention is used.
Key points:- The annual deduction is limited to the amount calculated under MACRS for that year.- You cannot accelerate or front-load more depreciation than allowed by the MACRS tables for the property’s class and method.
2. Section 179 Deduction Limits
Section 179 allows taxpayers to expense (deduct immediately) the cost of certain qualifying property, subject to annual dollar limits. However, for rental real estate, the Section 179 deduction is generally not available for the building itself or its structural components. It may be available for certain qualifying improvements (e.g., roofs, HVAC, fire protection, security systems) and certain personal property used in rental activities.
Limits for 2025:- Maximum Section 179 deduction: $2,500,000- Phase-out threshold: $4,000,000- For qualifying SUVs: $31,300- The deduction cannot exceed the taxpayer’s aggregate taxable income from active trades or businesses.
Note: Estates and trusts cannot claim Section 179, and property held for investment (not active business use) does not qualify.
3. Special (Bonus) Depreciation Limits
Bonus depreciation allows for an additional first-year deduction for certain qualifying property. For most residential rental property, bonus depreciation does not apply to the building itself, but may apply to certain improvements or personal property with a recovery period of 20 years or less.
Limits for 2025:- For property acquired after January 19, 2025: 100% bonus depreciation is available for qualifying property.- For property acquired before January 20, 2025: the phase-down schedule applies (40% in 2025).
4. Passive Activity Loss (PAL) Limitations
Depreciation is a deductible expense that can create or increase a rental loss. However, for most taxpayers, rental real estate is considered a passive activity, and losses from passive activities (including those created by depreciation) are generally only deductible against passive income.
Key rules:- If your rental real estate activity produces a net loss (due to depreciation and other expenses), you may not be able to deduct the full loss against non-passive income (such as wages or portfolio income).- The general rule is that passive losses are only deductible to the extent of passive income.- Exception: Up to $25,000 of passive rental real estate losses may be deductible against non-passive income if you “actively participate” and your modified adjusted gross income (MAGI) is $100,000 or less. This allowance phases out between $100,000 and $150,000 of MAGI.
5. At-Risk Rules
The at-risk rules (IRC §465) limit the amount of loss, including depreciation, that you can deduct to the amount you have at risk in the activity. If you have nonrecourse financing or other amounts not at risk, your deductible loss (including depreciation) may be limited.
6. Excess Business Loss Limitation
For noncorporate taxpayers, IRC §461(l) limits the amount of business losses (including those from rental activities) that can offset non-business income. For 2025, the excess business loss limitation is permanent and is adjusted for inflation.
7. Listed Property and Luxury Auto Limits
If you depreciate certain “listed property” (such as vehicles used in rental activities), there are annual limits on the amount of depreciation that can be claimed, especially for passenger automobiles and certain SUVs.
8. Basis Limitation
You cannot depreciate more than your adjusted basis in the property. If you have already fully depreciated the property (i.e., your basis is zero), you cannot claim further depreciation.
9. No Depreciation for Land
You cannot depreciate the cost of land. Only the cost of the building and certain land improvements (not the land itself) is depreciable.
8. Summary Table of Key Limits:
9. Conclusion
While there is no single “cap” on the annual depreciation deduction for rental property, the amount you can claim is limited by the MACRS calculation, the property’s basis, and, in some cases, by Section 179 and bonus depreciation rules (for certain improvements and personal property). Additionally, your ability to use rental losses (including those created by depreciation) may be limited by the passive activity loss rules, at-risk rules, and excess business loss limitation. For vehicles and certain other property, additional annual limits may apply. You cannot depreciate land, and you cannot claim more depreciation than your basis in the property.
If you have a specific scenario (e.g., a rental property with a large loss, or a question about a particular improvement or vehicle), please provide more details for a tailored analysis.
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