This benefit is based on the assumption that the improvements on the land have a limited useful life. The improvements include everything but the land. The I.R.S. allows us to assume that our rental properties will depreciate to zero in 27½ years. This means that each year we can deduct our loss of this depreciation against our income from the property.

Example:

Jan 1st-
· Bought duplex for $100,000
· Lot valued at $10,000
· Improvements valued at $90,000

1 yr later-
· Depreciation in value of improvements equal to 90,000 x .0363 = $3,272.00.

The amount then of 3,272.00 can be deducted from your income before calculating your income tax.