Discover how to properly calculate and maximize rental property depreciation benefits in Denver’s real estate market. Learn about MACRS, bonus depreciation, and local tax implications.
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How to Calculate Rental Property Depreciation: A Denver Investor’s Guide

Owning rental property in Denver’s competitive market can be a smart investment strategy, but understanding how depreciation works is crucial to maximizing your returns. Depreciation allows you to deduct the cost of your investment property over time, creating significant tax advantages that many investors overlook. Whether you’re managing a short-term rental in the heart of Denver or a long-term rental in the surrounding foothills, knowing how to properly calculate depreciation can make a substantial difference in your bottom line.

What Is Rental Property Depreciation?

Depreciation is a tax deduction that acknowledges the gradual wear and tear on your property. The IRS allows rental property owners to deduct the cost of their residential real estate over 27.5 years (or 39 years for commercial properties). This non-cash expense can significantly reduce your taxable rental income without affecting your actual cash flow.

For Denver property investors, depreciation is particularly valuable given the area’s strong appreciation trends. While your Denver property might be gaining market value, you can still claim depreciation deductions, creating a powerful tax advantage unique to real estate investing.

How Depreciation Is Calculated for Denver Rental Properties

The Basic Depreciation Formula

The standard formula for calculating annual depreciation is:

(Cost Basis – Land Value) ÷ Recovery Period = Annual Depreciation Deduction

For residential rental properties in Denver, the recovery period is 27.5 years. Commercial properties use a 39-year recovery period.

Determining Your Cost Basis

Your cost basis includes the purchase price plus certain closing costs and improvements. For Denver properties, this typically includes:

• Purchase price of the property
• Closing costs (title fees, legal fees, transfer taxes)
• Major improvements and renovations
• Permit and inspection fees common in Denver neighborhoods

Separating Land Value

Only the building structure depreciates—land does not. In Denver’s varied market, land values can represent 20-40% of a property’s total value, depending on the neighborhood. To determine land value, you can:

• Check your property tax assessment (Denver County provides a breakdown)
• Review your settlement statement
• Commission a property appraisal that separates land and building values

Depreciation Methods for Denver Rental Properties

Modified Accelerated Cost Recovery System (MACRS)

The IRS requires residential rental property owners to use the Modified Accelerated Cost Recovery System (MACRS) for properties placed in service after 1986. This system uses straight-line depreciation for real property, meaning you’ll deduct the same amount each year over the recovery period.

Component Depreciation Strategies

Denver investors can potentially increase depreciation deductions by separating property components that depreciate over shorter periods:

• Personal property items (appliances, furniture) – 5-7 years
• Land improvements (driveways, landscaping) – 15 years
• Qualified improvement property – 15 years

This strategy, sometimes called cost segregation, can be particularly valuable for higher-end Denver properties or short-term rentals with substantial furnishings.

Denver-Specific Depreciation Considerations

Historic Properties

Denver’s numerous historic districts present special depreciation considerations. While historic properties follow standard depreciation rules, owners may qualify for additional tax incentives through Colorado’s Historic Preservation Tax Credit program, which can provide credits of up to 25% of qualified rehabilitation expenditures.

Short-Term Rental Considerations

For Denver’s booming short-term rental market, depreciation calculations might differ based on personal use. If you occasionally use your rental property personally, you’ll need to prorate depreciation based on the percentage of time the property is rented or available for rent.

Recent Tax Law Changes Affecting Denver Investors

Recent tax legislation has created additional opportunities for Denver property investors. Bonus depreciation allows for immediate expensing of certain property improvements and personal property. Additionally, Section 179 expensing may apply to specific components of your rental property.

Ready to Maximize Your Denver Rental Property Tax Benefits?

Understanding depreciation is just one aspect of successful property management. At SimplifyRenting, we help Denver property owners maximize returns while minimizing hassle. Our team of local experts can guide you through the complexities of property management, from tax optimization to dynamic pricing strategies that deliver 24% higher nightly rates.

Get a FREE rental analysis today to discover how much your Denver property could earn as a professionally managed rental, complete with expert guidance on maximizing tax advantages like depreciation.