Calculating Depreciation on a Low-Priced Property

[Sammy Lyon]

Hi BP sleuths!

I wanted to share this tax question here, I was hoping my accountant could help but he didn’t seem to have much advice about this. I’ve got some choices to make about depreciation on a rental property, and would love to hear people’s thoughts.

The property is an SFR, closed mid-December 2018, I received a few hundred dollars in rental credits at closing. So only a little bit of income in 2018, a little prepaid interest and insurance, and only a few days for depreciation.

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Question 1. Which value would you use for depreciation?

Lender’s Appraisal

$45,000

appraisal was not split into building and land — if I used this number would I just approximate 25% land value ($11,250) / 75% building value? ($33,750)

County Tax Assessor “Market Values”

$38,100

split into $13,300 land value and $24,800 building value

taxes are re-assessed every 3 years, not tied to sale date

County Tax Assessor “Assessed Values”

$13,340

split into $4,660 land value and $8,680 building value

I’m not sure what this is

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Question 2. What are the consequences of taking the first year $25,000 bonus depreciation?

If I use the County Tax Assessor “Market Values” I would depreciate $24,800 over 27.5 years. If I take the $25,000 bonus depreciation I will have fully depreciated the property in the first month of ownership, and all future income would not benefit from depreciation. Or is it worth just getting the $25k depreciation up front? My tax rate is about 22% and my exit plan is to hold onto the property for at least 3 years and 1031 exchange it into something larger.

If I use the Lender’s Appraisal (and let’s say it’s $33,750 building value depreciated over 27.5 years) - would I calculate the straight line depreciation on $33,750 THEN take the $25,000 bonus, or calculate straight line after the bonus, or not take the bonus at all?

My hunch is that if the property values were higher there would not be a question whether to take the bonus, but fully depreciating the property in the first month of ownership has possibly different consequences. This was not something I had considered, and it’s unclear to me what the pros and cons of this situation are.

Thanks in advance for your comments and ideas!