Depreciate Real Estate
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Depreciate Real Estate (by Johnny B. [MA]) Apr 11, 2021 5:52 PM
       Depreciate Real Estate (by MC [PA]) Apr 11, 2021 6:33 PM
       Depreciate Real Estate (by Jim in O C [CA]) Apr 11, 2021 6:40 PM
       Depreciate Real Estate (by Bonanza [NC]) Apr 11, 2021 7:24 PM
       Depreciate Real Estate (by Ray-N-Pa [PA]) Apr 11, 2021 7:35 PM
       Depreciate Real Estate (by Johnny B. [MA]) Apr 11, 2021 8:00 PM
       Depreciate Real Estate (by Robert J [CA]) Apr 11, 2021 8:40 PM
       Depreciate Real Estate (by Allym [NJ]) Apr 11, 2021 9:18 PM
       Depreciate Real Estate (by Steve [MA]) Apr 12, 2021 6:41 AM

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Depreciate Real Estate (by Johnny B. [MA]) Posted on: Apr 11, 2021 5:52 PM

How do you typically calculate the value of your building to be used for depreciation for tax purposes? Itís my understanding these is not one right way to do this, as long as you can support your methodology. What are some of the methods used by the board members?

Depreciate Real Estate (by MC [PA]) Posted on: Apr 11, 2021 6:33 PM

I straight line.

Depreciate Real Estate (by Jim in O C [CA]) Posted on: Apr 11, 2021 6:40 PM

We use our property tax bill which separates building and land.

Depreciate Real Estate (by Bonanza [NC]) Posted on: Apr 11, 2021 7:24 PM

Cost segregation is something your CPA should be doing. I tell them what it should be. I'm the expert (and you should be too)

You can't depreciate the land so you want to make that as small as possible. In my area I can comfortably justify 1 acre at 20,000 in value. So if I have a half acre lot, the land is worth 10,000. Now if the tax value is less on tax bill I'll use that. Whatever is lower. Use your local values to find out what land is worth.

For residential depreciation, if the property is 100K, you subtract the 10K (land) from it and you get 90K to deprecate.

You can cost segregate to accelerate the depreciation.

Personal property is depreciated over 5 years. Personal property might be appliances, bookcases, shelving or whatever. It usually is about 5% for me, sometimes more. Anything that is not the walls, ceiling, and floor.

Land improvements are depreciated over 15 years. They include the concrete drive, sidewalk, landscaping, fencing, decking, a fountain, etc. It is usually about 10% for me

Everything else is deprecated over 27.5 years.

So 100K less 10K is 90K

Personal prop - 5% of 90K is $4500 depreciated over 5 years

Land Improvement - 10% of 90K is $9000 depreciated over 15 years

The building - 85% of 90K is $76,500 depreciated over 27.5

You can get as aggressive as you can justify. Lots of concrete might bump up the Land Improvement value. Concrete is expensive. :-)

Depreciate Real Estate (by Ray-N-Pa [PA]) Posted on: Apr 11, 2021 7:35 PM

I am with Jim on how to get the first break down on what is depreciable and what is not.

You don't get any discount if your dirt is new compared to being old.

Around here it is normally somewhere in the neighborhood of 75% improvement and 25% land. Those number do vary a great deal though depending where you are at in the states. In SoCal it could be 40% improvements and 60% land. Your tax bill should break down this initial number.

From there you follow Bonanza method.

The 27.5 year period is for residential real estate. If the rental is commercial, then you have 39.5 years --24.154.xx.x

Depreciate Real Estate (by Johnny B. [MA]) Posted on: Apr 11, 2021 8:00 PM

I understand the basics of depreciation, that wasnít the intention of the post. Mainly what Iím trying to get at it how do you justify your building value? The tax bill is a good example where it breaks out building versus land. But generally tax assessed value (at least in my area) is much less than real market value, so using the tax assessor value would decrease your deduction. You can use sales price and then use the tax assessor ratio of land vs. building and apply it to the sales price. I had a place I bought off-market last year that appraised higher than sales price so I think Iím going to use the appraisal value. The intent of my post was to see what other methods people have used.

Depreciate Real Estate (by Robert J [CA]) Posted on: Apr 11, 2021 8:40 PM

There are two different methods used by most CPA's. First of all when you purchase a property, your offer can list the price you are paying for land, structures, easements, etc.

But the best method is to take 85% of the purchase price and put that towards the "improvement", also know as the structure and only 15% for the land value. Then you depreciate the structure over a 27.5 years for a residence and 39 years for a commercial property such as retail, offices or malls.

Depreciate Real Estate (by Allym [NJ]) Posted on: Apr 11, 2021 9:18 PM

Mine are all based on the value, determined by a profession property assessor I hired, based on comparables, on the date of my mother's death, actually one day before her death. Sixteen years have passed so I have 11 years to go before they are fully depreciated. --108.24.xx.xx

Depreciate Real Estate (by Steve [MA]) Posted on: Apr 12, 2021 6:41 AM

Johnny B, before deciding how to breakdown the land value & the improvement value, you need to determine if your plan is plan to keep the properties a long time or short time. One thing that some investors forget to consider is that at some point you most likely will have to recapture some of this depreciation.

I know that some investors like to break down all of the components & use different time periods for each item instead of using 27.5 year straight line depreciation for everything except the land. I personally have never been a fan of doing this as I think it can be rather cumbersome to keep track of and could possibly red flag you for a tax audit.

Starting with our first purchase, we've always used straight line depreciation (27.5 years) for our investment properties. We use a combination of the purchase price, any appraisal done at time of purchase & the city / town RE tax assessment to determine a separate value for the buildings / contents and one for the land. Then any improvements are tracked separately & written off according to their anticipated life expectancy. Usually anything that we can classify as a repair & not an actual improvement we expense off in the income tax year it was paid in. So far our method has work well for us & has even survived 3 complete IRS audits.

As you know during the course of our LLing career we've had several properties totaled due to fire. Each time this happened, we've rebuilt them & were able to restart our depreciation using values based on the amount spent for the reconstruction. Since we didn't sell them we weren't required to recapture any of the depreciation we'd already taken. Between not having to recapture our previous depreciation, recalculating a new depreciation value & our business disruption insurance coverage (aka lost of rent), with the exception of our first loss, we've definitely been able to make lemonade out of lemons.

IMO once you've settled on whether you want fast (component values) or slow (27.5 straight line) depreciation the key points to keep in mind are;

1. These values need to be determined at the time of their purchase.

2. You need to be consistent.

3. You need to keep good records.

4. You need to use a method that both you & your income tax preparer agree on.

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