Can You Depreciate a Gifted Rental Property?

by Luke Arthur ; Updated July 27, 2017

Receiving a piece of real estate as a gift gives you the opportunity to create a steady stream of rental income without having to invest your own money into a property. When you receive a house as a gift and turn it into a rental property, you do have the ability to deduct depreciation on the property.

Cost Basis

When you receive a piece of property as a gift and then turn it into a rental property, you must determine its cost basis before depreciation can begin. When a property is received as a gift, the cost basis becomes the fair market value of the house at the time of the receipt of the gift. The actual fair market value is typically determined by an appraisal by a certified real estate appraiser. The appraiser compares the house to other similar homes sold to come up with a value.

Allocating Value

Once you receive a piece of property as a gift and turn it into a rental, the process of depreciating that property involves allocating the value of the rental to the proper areas. For instance, some of the value is attributed to the land, some to the structure and some to the contents inside the structure. No depreciation can be claimed on the value of the land itself. All of the depreciation you claim has to come from the structure and from the contents inside.

Video of the Day

Brought to you by Sapling
Brought to you by Sapling

Useful Life

Once you allocate the value to the correct pieces of property, you will take a deduction based on the amount of useful life left in the items. For example, with the real estate itself, you get to depreciate the value based on a useful life of 27.5 years. This means that you take the cost basis of the house itself and divide it by 27.5. The amount that you come up with is the amount you get to deduct for depreciation in year one.

Considerations

When you depreciate property that has been gifted, you also have to take into consideration any gift taxes that are paid on the property. If the person giving you the property has already reached his lifetime gift tax limit, then gift taxes will be due on the gift. When this happens, the amount of the gift taxes paid will be added to the total cost basis of the property. This could give you a bigger deduction when it comes time to start depreciating.

About the Author

Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.

Cite this Article A tool to create a citation to reference this article Cite this Article