Depreciation Deduction

[Bilgefisher]

I have been trying to wrap my mind around this concept. I'm not sure I fully understand. I have seen it in Diane's, Vollucci's, and Berges' books.

If you have a rental property, commercial or residential, your allowed to claim a deduction on your taxes for a building deterioration even if the buildings value increases? 3.64% for rental housing under 27.5 years and 2.56% for commercial buildings under 39 years? (I got those numbers out of Barron's Real Estate Dictionary, I'm not sure how accurate they are.) No deduction for land.

How are fixed up properties affected by this?
Are there no deduction after the building has matured past given ages?

 

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[Diane Kennedy]

I have been trying to wrap my mind around this concept. I'm not sure I fully understand. I have seen it in Diane's, Vollucci's, and Berges' books.

If you have a rental property, commercial or residential, your allowed to claim a deduction on your taxes for a building deterioration even if the buildings value increases? 3.64% for rental housing under 27.5 years and 2.56% for commercial buildings under 39 years? (I got those numbers out of Barron's Real Estate Dictionary, I'm not sure how accurate they are.) No deduction for land.

How are fixed up properties affected by this?
Are there no deduction after the building has matured past given ages?

First, the basics: You have a basis for a property when you purchase it. This increases over time as you add improvements (as opposed to repairs whch are immediately deductible and thus do not add to the basis).

The land value is not depreciable. (Issue: How do you break out land v fixed costs?)

The improvements (building) is depreciable at 27.5 years for residential and 39 years for commercial under MACRS depreciation. (Issue: If you're subject to AMT, you have to use straightline depreciation with longer life)

Most people stop right there. But there is more.

The buildings will also have personal property (aka chattels) components. In an apartment, for example, you have items like garbage disposals, refrigerators, stove, fans, air conditioners, etc.. These have a depreciable life that is less than the 27.5 or 39 year. You can allocate part of the basis to these shorter lived properties and thus increase the amount of depreciation.

I'm going to stop there for now. LMK if you're with me and I'll go on to Depreciation 202.

 

[EasyMoney_in_NC]

My CPA told me not to bother taking the personal property depreciations (over 5 years IIRC) from the simple point of the recapture and the basis reduction.....does that sound correct? If so then once its depreciated (lets say 5 years), would you/could you not replace the depreciated items with new, thereby restoring the original basis? Would the depreciated value and replacement of those items be worth the hassle? ......Just think aloud here. Maybe stupid questions

 

[Bilgefisher]

I guess the percentages I gave would fall in line with straight line depreciation. How are the accelerated depreciation rates determined? Ready for 202

 

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[Diane Kennedy]

My CPA told me not to bother taking the personal property depreciations (over 5 years IIRC) from the simple point of the recapture and the basis reduction.....does that sound correct? If so then once its depreciated (lets say 5 years), would you/could you not replace the depreciated items with new, thereby restoring the original basis? Would the depreciated value and replacement of those items be worth the hassle? ......Just think aloud here. Maybe stupid questions

Easy, you're not picking up any additional depreciation with my method. Instead you're front-end loading the depreciation. In the long run, does it matter? No. But, based on the time value of money (ie...I'd rather pay a dollar 7 years from now than a dollar today) it can make a lot of sense. PLUS if you do the cost segregation method (which is the official name for breaking out the personal property items), the personal property can qualify for Sec 179 - which gives you a one time expensing ability of over $100K.

Let me tell you, that little trick has saved my husband and I more than once when we had a year with higher than expected income.

Again, though, you don't get any more deduction than you do if you just wait 27.5 or 39 years....you're able to time it better though.

 

[Diane Kennedy]

I guess the percentages I gave would fall in line with straight line depreciation. How are the accelerated depreciation rates determined? Ready for 202

I don't know off the top of my head. Go to www.irs.gov and look up depreciation tables. There is actually very good info on their site.

More later this week!