We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Accounting

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

How do I Calculate Investment Property Depreciation?

By Marsha A. Tisdale
Updated: May 16, 2024
Views: 12,673
Share

In order to calculate investment property depreciation, it is important to know the useful life classification for that property. Depreciation is a measurement of the decline in value of an asset over time due to use or deterioration. For tax purposes, the useful life for assets may be found in depreciation schedules printed by governmental taxing authorities. In the United States, this authority is the Internal Revenue Service (IRS).

Calculating investment property depreciation allows a tax advantage that the property investor may claim against his or her investment income. The actual amount that can be claimed will depend on the amount paid for the property, the type of property, and the method of depreciation used. An investor cannot deduct the entire cost of the property in the year of purchase. Since the property will be useful over several years, and therefore producing income over time, the cost is spread out over that same period of time.

In the United States, most business depreciation is computed using the Modified Accelerated Cost Recovery System, also known as MACRS. The IRS provides information concerning a property’s recovery class and recovery period, or useful life, and allowable depreciation methods. Residential rental property and commercial structures are two main depreciation classifications. Investment property depreciation periods for residential rental property are 27.5 years, and the period for commercial buildings is 39 years.

Under the MACRS system, the only depreciation method that can be used for either residential rental property or commercial buildings is straight-line depreciation. This means that the total allowable investment property depreciation, or investment cost, will be divided equally over the taxable life of the asset. The basis or amount invested in the asset is the cost of the investment property plus settlement fees, such as abstract fees, recording fees, and title insurance.

Property must be used in a business or income-producing activity in order for depreciation to be allowed. As investment property depreciation is claimed each year, the basis, or value, of the asset decreases by the amount of yearly allowable depreciation. This is true each year of the asset’s life, whether or not the taxpayer actually claims the full amount allowed.

When computing investment property depreciation, only the investment cost applicable to the buildings can be depreciated, and not the cost of the land upon which the buildings are located. Land cannot be depreciated because it does not get used up or wear out as structures or other assets do. However, land preparation costs, such as landscaping, can be depreciated if they are associated with depreciable property and a life for them can be determined.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
Share
https://www.smartcapitalmind.com/how-do-i-calculate-investment-property-depreciation.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.