Depreciation of a Rehab - No depreciation on added value?

[Eddy Jerez]

I was doing my 2019 taxes, and my accountant says that the added value of my condo investment cannot be depreciated. Say What?  I bought November 2018 for $215k and rehabbed.  Been renting very well for short term occupancy, including Airbnb.  Finally refinanced this year and appraisal came out at $385k.  My accountant said that the added value to my asset cannot be depreciated, only the 27.5 year depreciation to the original cost of $215k allowed?  I need a second opinion but this must be an easy answer for seasoned investors.  

[Linda Weygant]

Your accountant is absolutely correct.  The increase in value is not depreciable.

However, the amount that you spent on the rehab itself is depreciable, although some of it could possibly be deducted immediately under a De Minimus Safe Harbor.

Think about it this way - you want to depreciate the increase in value.  Do you also want to declare that increase as income?  Tax theory is that (in most cases) you actually realize a gain or loss in order to pay taxes on it.  Paying tax or granting deductions on unrealized gains and losses would be a nightmare.  Imagine having to get an appraisal each year and deducting items or declaring income based on the rise and fall of the markets.