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Real Estate Depreciation?

Discussion in 'Real Estate Investing' started by bosco, Feb 11, 2008.

  1. bosco
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    bosco New Contributor

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    How does depreciation work and how does one determine approximately what a particular value would be per year? I know it's best to discuss with a CPA but just looking for an explanation. What type of depreciation schedule do most use for rentals?

    Thanks!
     
  2. bflbob
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    bflbob Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Here's a real quick reference.
    http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P07_2960
    So, it's mainly 27.5 years for rental property.

    But you can break out certain assets to other classes.
    For example, appliances can be depreciated quicker.
    Ditto for carpeting, fixtures, landscaping, etc.

    On top of that, there is a Section 179 allowance.
    This let's you fully depreciate assets in one year, if they meet certain limits.
     
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  3. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Depreciation just takes into account that certain types of assets depreciate (drop) in value over a period of time. The government allows a deduction of the value of the asset over that period of time.

    For some things, the government defines how long that period of time is -- for example, as bflbob pointed out above, the depreciation timeframe for a residential property is 27.5 years. This means that 1/27.5 of the value of the property can be deducted every year for 27.5 years. Keep in mind that since the land is not a depreciating asset (it isn't going to erode or decay over any short period of time), it can't be deducted; only the physical structure (the building) value can be deducted.

    Depreciation can also be used for other capital expenses, like appliances, a new roof, etc. Generally, the time frame over which these are depreciated is equivalent to what is considered their "useful life." So, the purchase of a new computer would likely be depreciated over 3-4 years, and the purchase of a new dishwasher might be depreciated over 8-10 years.

    Hope that helps...
     
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  4. Yankees338
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    Yankees338 Bronze Contributor

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    Rep+++ for you both...excellent responses.

    JScott, how do you determine the value of the building as opposed to the value of the property? Would it just be as simple as the difference between the assessed value of the entire property and local property comps, or is it more complex than that?
     
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  5. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Yup, this is generally determined by the local assessor...

    A good rule of thumb (though perhaps not in high real estate places like California where land is tremendously expensive) is that the structure value (the depreciable part) is about 75% of the total value of the property.

    So, if you buy a house for $200,000, you can likely depreciate about $150,000 over 27.5 years...
     
  6. bflbob
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    bflbob Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    I know that in our area, the tax assessor determines an assessed value for the total property, and the land alone. If the land is 18% of the total, that's the percentage I would use based on my total cost of the property.
     
  7. Yankees338
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    Yankees338 Bronze Contributor

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    Gotcha.

    Thanks guys.
     
  8. bosco
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    bosco New Contributor

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    Thanks for the explanation. Sorry for the late response. I got hurt snowmobiling and was in the hospital.

    Thanks again!
     

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