Personal Property Used in
Residential Rental Activities

Property that is used in business to produce income falls into two broad categories; "personal property" and real property . The same holds true for any residential rental property activity that is operated to produce income.

For rental real estate, the bulk of the total property investment lies in the real property (or real estate) portion which consists of the land, buildings, landscaping, etc. The remaining property normally consists of the "movable" property inside the building, such as stoves, refrigerators, furniture, etc. This movable property is categorized as "personal property".

Advantages of Personal Property in Rental Real Estate

From our discussion of depreciation , Uncle Sam allows owners of residential rental property to "depreciate" their property in order to recoup their investment over time. This is allowed so that investors can replace their income producing property as it wears out and must be replaced.

To accomplish this, different types of property have their own specific "recovery periods" that specify the number of years that they can be depreciated. Property that is very rugged and doesn't wear out easily (such as buildings) have long recovery periods (27.5 years for residential rental property).

On the other hand, less durable property that wears out faster will have shorter recovery periods. Refrigerators, for instance, have 5-year recovery periods. With a shorter recovery period, the property's relative depreciation expense will be higher each year. This makes the property more effective at reducing the property owner's taxable income and tax bill.

The Section 179 Deduction for Personal Property

Certain types of business property that is purchased in a given year for use in a rental property activity (such as a refrigerator for example) can qualify to use the "section 179" deduction. The section 179 deduction allows certain business property to have its entire cost basis (purchase price plus tax and any other fees) deducted from taxable income in the year of purchase.

This is a "one time allowance", so taking it will prohibit the property from being depreciated in future years. Buildings, however, are not allowed to use the section 179 deduction. The section 179 deduction is powerful and really packs a "one time wallop" to reduce your income tax bill.

Please note: The above information is general in nature and should not be considered tax or accounting advice. It should not be relied upon for your own particular circumstances. For tax advice, please consult the services of a qualified accountant or tax attorney.

For more in-depth information on various categories of property and how to depreciate them, please visit The Landlord's Library book collection. It's a great "one-stop" resource that provides everything you'll need for improving your landlording success.

Return from Personal Property to Federal Income Tax Filing