5 Year Lifetime Rule Explained for Real Estate Investors

If you own rental property or are thinking about buying one, you’ll hear the term “5 year lifetime rule” tossed around. It’s a tax rule that says certain assets lose value over a five‑year period for tax purposes. Knowing how it works can save you money and help you plan better.

Why the Rule Exists

The tax code wants to match the wear and tear of an asset with the income it generates. For things like furniture, appliances, or small equipment inside a rental unit, the government assumes they only last about five years. You can claim a portion of their cost each year as a deduction, called depreciation.

How to Use It in Your Rentals

First, list every item that falls under the five‑year category. Common examples are refrigerators, washers, dryers, and air‑conditioning units. Then, divide the purchase price by five. That number is the amount you can write off each year.

For instance, if you spent ₹2,00,000 on a new fridge, you can deduct ₹40,000 annually for five years. Those deductions lower your taxable rental income, which means you keep more cash in hand.

Remember, you only claim the deduction while the property is rented out. If you sell the building later, you might have to recapture some of the depreciation, which adds to your capital gains tax. So keep good records of every purchase and the dates you started using the items.

One practical tip: bundle small purchases into a single invoice if you can. It makes tracking easier and reduces paperwork. Also, don’t forget to update your depreciation schedule if you replace an item before the five‑year period ends. The new cost starts a fresh five‑year clock.

Finally, talk to a tax professional. The rule sounds simple, but the details can get tricky, especially when you own multiple units. A pro can help you maximize deductions without triggering unexpected taxes later.

Understanding the 5 year lifetime rule is a small step that can lead to big savings. Use it wisely, keep your records clean, and let the tax code work for you, not against you.