6 Real Estate Depreciation Examples

Real estate depreciation is a tax deduction that allows real estate investors to write off the cost of their investment property over time. This deduction is meant to account for the gradual wear and tear that occurs to a property over its useful life. Depreciation is a non-cash expense, meaning that the investor does not have to spend any additional money to claim this deduction. Instead, they are simply accounting for the fact that their property is losing value over time.

Real estate depreciation examples

The amount of depreciation that an investor can claim each year depends on the cost of the property, its useful life, and its depreciation method. The useful life of a property is the estimated amount of time that the property will be used before it needs to be replaced. The depreciation method is the way in which the cost of the property is divided up over its useful life.

Real estate depreciation examples

Depreciation is an important tax deduction for real estate investors because it can significantly reduce their taxable income. In this article, we will explore some real estate depreciation examples to help investors understand how this deduction works.

Residential Rental Property

Residential rental property is one of the most common types of investment property. This could be a single-family home, a duplex, a triplex, or an apartment complex. Residential rental property can be depreciated over 27.5 years using the straight-line method. This means that the cost of the property is divided by 27.5, and that amount is deducted from the investor’s taxable income each year.

For example, let’s say that an investor purchases a rental property for $400,000. They can depreciate the property over 27.5 years, which means that they can deduct $14,545.45 ($400,000 ÷ 27.5 years) from their taxable income each year.

Commercial Property

Commercial property includes any type of real estate that is used for business purposes. This could be an office building, a retail space, or a warehouse. Commercial property can be depreciated over 39 years using the straight-line method.

For example, let’s say that an investor purchases an office building for $1 million. They can depreciate the property over 39 years, which means that they can deduct $25,641.03 ($1 million ÷ 39 years) from their taxable income each year.

Land Improvements

Land improvements are enhancements made to a property that increase its value or make it more useful. This could include things like adding a parking lot, installing landscaping, or building a fence. Land improvements can be depreciated over 15 years using the straight-line method.

For example, let’s say that an investor spends $100,000 to install a parking lot on their commercial property. They can depreciate the cost of the parking lot over 15 years, which means that they can deduct $6,666.67 ($100,000 ÷ 15 years) from their taxable income each year.

Rental Property Renovations

When an investor makes improvements to a rental property, such as adding a new roof or renovating the kitchen, they can also depreciate the cost of those improvements over time. The useful life of the improvement will depend on what it is and how long it is expected to last. Generally, improvements to a rental property can be depreciated over 27.5 years using the straight-line method.

For example, let’s say that an investor spends $20,000 to renovate the kitchen in their rental property. They can depreciate the cost of the renovation over 27.5 years, which means that they can deduct $727.27 ($20,000 ÷ 27.5 years) from their taxable income each year.

Vacation Homes

If an investor owns a vacation home that they also rent out, they can depreciate the cost of the property over 27.5 years using the straight-line method, just like with residential rental property. However, there are some restrictions on how much depreciation can be claimed if the vacation home is not rented out for the majority of the year.

If the investor uses the vacation home for personal use for more than 14 days per year or more than 10% of the number of days that the home is rented out during the year (whichever is greater), then the amount of depreciation that can be claimed is reduced. In this case, the investor can only deduct the portion of the property’s expenses that are related to the rental activity.

For example, let’s say that an investor purchases a vacation home for $500,000 and rents it out for 200 days during the year. They also use the home for personal use for 30 days during the year. Since 30 days is more than 10% of the 200 days that the home was rented out, the investor’s depreciation deduction will be reduced. They can only deduct the portion of the property’s expenses that is related to the rental activity, which might include things like property management fees, repairs, and utilities.

Bonus Depreciation

In addition to regular depreciation, real estate investors may also be eligible for bonus depreciation. Bonus depreciation allows investors to deduct a larger portion of the property’s cost in the year that it was placed into service.

For example, under the Tax Cuts and Jobs Act, investors can deduct 100% of the cost of qualified property placed into service after September 27, 2017, and before January 1, 2023. This includes things like new equipment or improvements to the property, such as adding a new roof or renovating a bathroom.

Conclusion

Real estate depreciation is an important tax deduction that can help investors reduce their taxable income. By deducting the cost of their property over time, investors can account for the gradual wear and tear that occurs to their property over its useful life. Depreciation can be claimed for a variety of types of real estate, including residential rental property, commercial property, land improvements, rental property renovations, and vacation homes. By understanding how depreciation works and what types of property are eligible, real estate investors can maximize their tax savings and improve their overall return on investment.

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