Housing Reports Show Improvement as Low Mortgage Rates Continue

Housing reports continue to show improvement at the same time that low mortgage rates continue to remain intact. The current housing market conditions are favorable for consumers who wish to purchase and finance a home under very affordable circumstances. According to The U.S. Census Bureau and the Department of Housing and Urban Development, new home sales increased more than expectations even after decreasing in December. The National Association of Realtors reported that pending home sales of existing homes increased 2% in January which was above the forecast of 1%. Mortgage rates have remained steady which is helping the housing market to slowly recover as shown by the latest reports. The most popular mortgage for a home purchase is the 30 year fixed mortgage with rates which remain at 3.500%. The 15 year fixed mortgage with rates at 2.875% has been most popular with refinances. Some consumers, especially short term home buyers, are opting for the  5/1 adjustable rate mortgage which is at 2.250%. With good credit, these lowest mortgage rates are available with 0.7 to 1% origination. Lenders also examine employment, income and assets for a pattern of consistent behavior by borrowers. Mortgage refinances to a lower mortgage rate are now available with Harp 2.0 which offers easier guidelines and does not require an appraisal under most circumstances. This mortgage program is specifically designed for underwater borrowers.

How Segmented Depreciation Can Lower Your Tax Bill

When it comes to itemizing the depreciation of your rental property on your yearly tax return, there are a couple of options to consider. While the simpler (and standard) practice calls for landlords to simply divide the total value of a rental property by 27.5 years, taking roughly 1/27 of the property's value as a deduction each year, "segmented depreciation"---which splits the property into multiple assets that depreciate a varying rates---can ultimately save you money.

Modified Accelerated Cost Recovery System (MACRS) Explained

While the standard method of depreciation, also called "straight-line" depreciation, is certainly easier to understand, it has the disadvantage of not reflecting the reality when it comes to depreciating assets that last for a shorter period of time, such as carpets, refrigerators, and fencing.

In order to more accurately reflect this reality, the Internal Revenue Service developed the Modified Accelerated Cost Recovery System (MACRS) to account for the depreciation investment properties. Using this method, landlords can divide their rental properties in to several asset classes and depreciate them at varying rates. Under this system, assets such as appliances, carpeting, and furniture depreciating fully over a period of five years, allowing for much larger tax savings each year. At the end of the five-year period, you can replace these assets and start the short-term depreciation process all over again.

Standard Rates of Depreciation Under MACRS

Under MACRS General Depreciation System, rental property assets can be depreciated at the following rates:

  • Appliances such as stoves and refrigerators: 5 years
  • Fences, shrubbery, and driveways: 15 years
  • Property that doesn't have a "specified class life, and is not part of any other class": 7 years
  • Structural building elements such as furnaces, pipes, and actual construction materials: 27.5 years

Keep in Mind

When an income property is sold, the seller is required to recapture all depreciation at a rate of 25 percent. This means the IRS effectively assumes the owner took depreciation deductions and charges accordingly, so failure to take the deductions actually leads to a loss if the property is sold. Thus, it's in your best interest to maximize your depreciation deductions.

For more information about using MACRS to your advantage, talk a tax professional.