Can I depreciate my investment property?

You can depreciate investment real estate (the building, not the land). Here you consider a certain percentage of its “cost” (usually the purchase price plus transaction costs less the value of the land) each year as a reduction in the value of the property. Almost all business assets can be depreciated. Cars, for example, may be depreciated over a lifespan of 5 years.

In a straight-line method, you might take 20 percent a year of the cost of the car each year over 5 years as a loss of value. Residential real estate usually must be depreciated over 27.5 years. Again, using a straight-line method (equal parts taken each year), you would take 1/27.5 of the cost each year as a loss.
Remember: Only the building can be depreciated—not the land. Of course, the value of property usually goes up, not down. So how can you take a loss on an asset that’s increasing in value? A helpful way to understand this is to think of it as a “paper loss.” Most assets deteriorate over time. Even a house will  eventually fall away to dust. So instead of simply waiting until the end of its useful lifespan(arbitrarily decided by the government), you take a portion of the loss in value each year.

Do I write off depreciation?

Yes, it’s an expense like other rental property expenses, such as mortgage interest, taxes, insurance, water and utilities, and so on. But be sure to save all your receipts. In contrast to tax accounting for the home you live in for which the only deductions are typically property taxes and mortgage interest, almost everything is deductible for a rental property you own. You may be able to deduct a phone, auto, even business cards and other expenses you incur in managing the property. Check with your accountant.

Do I write depreciation off against my other income?

No, you can’t do that. Rather, you write depreciation off as one of the expenses against your rental income. Since it’s often a big number, it can frequently rum a property with a positive cash flow into one with a negative paper loss. Just remember that the loss from depreciation is not an out-of-pocket expense. It’s simply an accounting loss—it shows up only on paper.