• Betterment is a material addition or change to a property, such as increasing the amount of rentable square footage by adding another bedroom. • Adaptation changes a property to a new or different use, such as renovating a basement into a separate studio apartment to rent. • Restoration replaces a major structure or component of the property, such as replacing the heating and air conditioning system. In order to qualify for bonus depreciation, an improvement must have a useful life of 20 years or less, and must be purchased from an individual or entity that a taxpayer is not related to. Bonus depreciation can also be claimed on both new and used items purchased in 2018 or after. Prior to the TCJA, bonus depreciation was limited to new items only. Example of rental property bonus depreciation Assume an investor owns a single-family rental home worth $110,000 (excluding the value of the lot). The property generates an annual rental income of $14,000 and the operating expenses are $5,600 (excluding any mortgage payment), leaving $8,400 in pre-tax income. The home is depreciated over a period of 27.5 years, so the depreciation expense is $4,000 per year. Now assume an investor spends $10,000 to buy new kitchen appliances and carpeting. By claiming 100% bonus depreciation, an investor could deduct the entire improvement cost of $10,000 to reduce the taxable net income. In this example, by using bonus depreciation, an investor would have no taxable net income:
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