 Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website irs.gov, irs.gov. We have our starting point single filer, Mr. Anderson 90210 Beverly Hales living in. And we're going to say that they have just the rental property so we can focus just on the impact of the rental property coming from the Schedule E, which is formatted in essence as an income statement. For the purposes of this problem, we're going to say it's 100% rental property. It's not vacation property. We're not personally using it or living in it so that we can just focus on depreciation here. We've got starting point 120,000 of income, 20,000 of expenses to give us that 100,000 net income, which is flowing into Schedule one, which is flowing into the first page of the Form 1040 standard deduction, 12,000, 950, 87,050 taxable income. All right. Back to the Schedule E. We're focused on the depreciation. Now, when we think about depreciation, the first thing probably that comes to mind is the building itself that's going to have the biggest impact typically for depreciation in a rental property situation. And, and we have to think about that primarily when we first purchased the building or put it into place because that's when we have to figure out what the basis is and so on and pick the prep, the proper method. And then of course, the software might help us out from that point forward once we've properly put it on the books. And then there could be other depreciation for improvements and things like that, which we have to be careful from a bookkeeping standpoint to make sure that we pick out those items that need to be improvements as opposed to repairs. We might scan the repairs line item here to see if there are any like big items in there that look like they possibly should be categorized as improvements instead of the repairs. All right. So let's first think about the property itself. So remember when we get the property, there's a couple of ways that that might happen. We might just purchase the rental property in which case it's the most straightforward type of situation because the purchase price adjusted for anything we needed to get it in place for service. Increasing by those items is basically the cost or basis, but we could inherit the property in which case we've got to think about, okay, what's going to be the cost? Is it the fair market value or at the time of inheritance or the decease of the, of the, or we could get a gift of the property, which again gets kind of messy because then the basis, you know, it's kind of linked to the basis of the prior owner or something like that. Did we convert the property from our personal use to rental use? In which case you would think, okay, it doesn't need to be fair market value or the cost. And if the fair market value is higher than the cost, you would think that it would have to be remaining the cost when it was personal property. Otherwise you would have that step up in basis, kind of situation. And then you have the issue of breaking out between, between the building and the, the land. So let's think about that concept real quick. Let's say we purchase something, uh, we purchase for purchase the building for 200,000 building and land, the property. And then we need to break it out between, between land and building. And the question is, well, how do we do that? Because I'm going to pull this down. We just paid 200,000 for it. So one, one way you might do it is to take a look at the prior tax assessment, right? The prior tax assessment for property taxes, assessment. And let's say the prior time when they assessed it, the total amount was 160,000, 160,000 for the total. And they broke out between land and building on the tax assessment, 136,000 for, let's say this is, let's go house and then land. And then the land was 24,000 for a total total of the 160. So we can use basically those percentages. We can't use those same numbers because obviously it was at 160,000, but we can use like a ratio and I could say, okay, let's take this divided by this, make that a percent and that's 15% versus this divided by this, make that a percent, 85%. If I sum that up, it's a hundred percent. So that would be a common way that we might deal with this problem and say, okay, I'm just going to do the same thing here, 200,000 times the 85% and then I'm going to take the 200,000 times the 15%, breaking out the current cost that I paid for it, 170, 30 house to land. This is the depreciable component. This is the non depreciable component. So let's use that and then populate this into our depreciation schedule. So different softwares will look different, but the concept will be the same. You've got your depreciation schedules and I'm going to say that we've got the house and I probably should put the address, but I'm just going to put, you want to be as descriptive as possible, but I'm just going to go generic here and just say the house or the building is going to go to the schedule E and the category is going to be, the category is going to be a building date placed in service. Let's say it was placed in service on 02, 0203, 22. So we're going to be using the method that we're going to be using because it's a building will be a mid month convention. So it'll assume it was purchased in the middle of February, the cost I'm going to say, and remember when we calculate the cost to get to that 200,000, we've got to take into consider whether, you know, the stuff that was necessary in order to make the purchase happened, including all the cost to go through escrow and stuff might be included in the purchase price as opposed to being expensed at that point in time. But we're going to say 130, 170,000, 170,000, we're not, we don't have any 179 for it's going to be, the property is going to be 27.5 years straight line residential rental building. And so there we have it. And then the other is just land so I can put on the books, even though it's not going to depreciate schedule E category will be now land and 020322 and that's for the, what did we say 30,000, 30,000 to get to the 200,000. It's useful to put both those on the books, even though the land is not going to be depreciated and we don't have a balance sheet on our books. So why do we need it? Because it's useful to tie into of course the purchase price. So in the future, when we sell or something like that, we can see what happened, the building versus the land can tie into the purchase price. There's not going to be any depreciation on the land. So land, no depreciation and let's see the result. So that pulls into our schedule E. We see the populated here. If I go into the depreciate, we don't have a balance sheet, but we'll typically have these depreciation schedules to help us to kind of see what is happening. So now we've got the building versus the land. And if we kind of analyze this, we say, okay, it's a house. The date was acquired here. This is the depreciate 170,000 is the depreciable component and we're using SL straight line, mid month MM 27.5, the life, the years it's going to depreciate over. And then the rate from the tables using the table method is point, is that rate to give us the five, four, oh nine. In other words, if I took the 170,000 times the 0.03182, there we have it. Now let's actually try to calculate it using a straight line mid month convention to get a better understanding of what is happening. So it's a straight line method. So the start is pretty straightforward. 170,000 divided by the number of years, 27.5, that would be the amount if it was for an entire year, but it wasn't. We bought it in the middle or in the beginning of February, but it's a mid month convention. So we assume that we bought it, you know, at the middle of February. So if there's 12 months in the year, we've got 12 months minus like a month and a half. So 12 months, like 10 and a half months, right? Because, because we only had it for a month and a half. So we're going to say, let's say divided by 12, and that would be the amount per month times 10 and a half months times 10.5. And that gets us about the same number. So that's what's happening.