How does depreciation on real estate work?
Ive been reading a few real estate books here and there on investing, I understand it for the most part. When they touch basis on Depreciation and such, I get confused they say you can depreciate the land, building, and things like the pipes and wiring. Can anyone who invests in real estate, understands depreciation, and who uses it kindly explain it? Please can example(s) be presented?
- 1 decade agoFavorite Answer
It is great that you are talking about investing in Real Estate and how depreciation affects. As has been pointed out by others on this question, you can depreciate improvements, but you cannot depreciate land. Land will appreciate.
When you consider an income property, depreciation is the notional expense that will help you setup reserves for replacing the improvements at the end of life of the asset. It certainly is not a cash expense. But IRS allows you to decrease the income by the amount of depreciation. So it is a great tax play. You can hold on to the cash generated from Depreciation and keep investing it until you need to replace your improvement. So you are using the tax money for no interest and no taxes.
When you depreciate the property, the cost basis also reduces. If you were to make additions to a property, the cost of the property would increase. In case you depreciate a property, the cost basis would decrease. When you sell the property, your profit will be the difference of the selling price and the cost basis, not the purchase price. The IRS will then tax you for capital gains based on the appreciation as calculated above.
If you closer to San Jose, CA, Pl. feel free to contact me.
Disclosure: I am a Licensed Realtor working with Century 21 El Camino in Sunnyvale, CA.Source(s): Some great resources for understanding depreciation. http://www.invest-2win.com/depreciation.html http://www.landlordsoftware.com/recapture-tax.htm http://www.irs.gov/pub/irs-pdf/p534.pdf http://www.greatland.com/Content/PDF/Tax/TaxTables...
- 1 decade ago
An investment property depreciates over 27.5 (for house or multifamily, industrial is longer) years for the building value of the purchase. 200,000 valued at say 80%building/20%land = (200K * .8)/27.5 = $5,818. This is your yearly tax write-off against any source of income. Note that usually the building value is stated on your property tax assessment. However, the higher the building value the more depreciation you can claim. If you think you can "prove" (only if you are audited) that the building is worth more than the assessor says (replacement value higher due to material costs, etc) then you could state a higher value. Talk to your tax advisor.
When you buy things to improve your property you can also depreciate those purchases. When you paint your property you can expense the cost (write it off that year completely). Small items you can just expense like tools, some molding, a light etc. Bigger items depreciate the day they are installed not the day bought. Interior wiring and plumbing would be 27.5 years I believe. A roof, walls, major structural are the "life of the building" or 27.5 years. There are lots of differing depreciation rates depending on what it is, here are some examples:
•Refrigerators, ranges, dishwashers, carpeting, furniture – 5 years
•Land improvements (sidewalks, fences, landscaping shrubbery, septic systems, water pipes) – 15 years
•Computers and peripherals – 5 years
•Typewriters, adding machines, copiers – 5 years
•Automobiles and trucks under 13,000 lbs. – 5 years
•Office furniture (desks, chairs, file cabinets, etc.) – 7 years
•Residential rental property building – 27.5 years
•Non-residential rental property – 39 years
So for example if you bought 2 appliances for $500 on July 1st, your depreciation is $50 the first year because you installed ½ way into that year, then 100, 100, 100, 100, and finally $50.
- Anonymous1 decade ago
Land, generally, never depreciates in value. Everything else that's built upon it, on the other hand, does depreciate since it gets worn down. How buildings are depreciated is usually abritrary for accounting records, although there are some generally accepted methods of depreciation. Only certain methods are allowed for tax purposes. I've never seen pipes and wires depreciated separately. They are considered part of the building.Source(s): no real estate experience, some accounting experience
- 1 decade ago
Yeah land usually wont depreciate, you could say it will appreciate to more value. Buildings and tools etc in business often use depreciation methods like double declining, 150% declining, or straight line method. Straight line seems to be pretty common, just look up this stuff at google for more and better articles to really explain it if you want. Basically anything that gets worse with age, depreciates. Ex. wires get more worn and worse over time, so they depreciate in value.
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- FRAGINAL, JTMLv 71 decade ago
Depreciation occurs when the property has diminished in value due to time, environment and damage. For example, the value of the land will depreciate if the adjacent land was made into a garbage dumping area. Buildings, pipes and wiring depreciate in value when it becomes old and damaged.
- Kin TsuiLv 41 decade ago
For tax or accounting purpose, the procedure is to estimate the life of an asset and write off the cost over a period.
IRS or standard accounting practice have some guideline.
For example IRS allow a real estate to depreciate for 27.5 years, you bought a house for $550,000 and have yearly net rental income of $18,000 before depreciation allowance.
You may write it off the cost as depreciation over 27.5 years, meaning every year you may write off $20,000 for tax purpose. So you have rental income or $18,000 and depreciation allowance of $20,000, that mean you have $2,000 loss for tax purpose. From this example you may see you pocket the rent but owe no tax.
Funiture (refrigerator, stove, air-conditioner etc) or Fixture (painting, pipe or wiring etc) can be depreciated too.
- Anonymous1 decade ago
Things are worth less as they age. Usually. Real estate usually increases in value.
I've not heard about depreciating wiring and pipes.
- 1 decade ago
YOU CANNOT DEPRECIATE LAND FOR TAX PURPOSES.