Hi, I'm looking for an answer to this or links to resources since I've had a challenging time finding any. I hear that depreciation lasts for about 27 years and the amount deducted from tax can make the net income, from a buy and hold property, basically tax free.
What happens if the property is older than ~27 years? Is there no depreciation? If there is new depreciation from renovations or a new roof, how is it calculated? I can only guess that the data is recorded about when what was done and how much it is worth. Maybe a new floor in 2010, a new roof in 2012, etc. Also, these things aren't worth nearly as much as a whole house, so the depreciation would be much less. How is this figured?
I haven't yet noticed anyone talk about only buying houses that are very young so that they can take advantage of depreciation. Why not? It seems like buying new houses would be better. Thanks in advance for any info!
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
11y
The depreciation for the "improvements" starts when you buy the house. Age doesn't matter. The value is established when you buy, then decreases with deprecation. The assumption is the improvements are "wearing out" over the next 27.5 years vs. the value when you purchased.
When you make new capital improvements and repairs, two situations might apply. If this is a rental, improvements and repairs made before its rent-ready add to your basis. Depreciation on those starts when you spend the money.
After its rent ready, repairs are expenses and can be deducted in the year you spend the money. Capital improvements, like roofs and flooring, get depreciated over multiple years. Different items have different schedules. So, you track each one individually and take the depreciation as its allowed. Flooring, for example, has a five year depreciation schedule.
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
Depreciation, relative to taxes, is a deduction against the income of the property. The dollar amount is calculated in one of several methods, most commonly straight-line. In case of residential real estate, it is 27.5 years.
While this is not intuitive, the 27.5 years starts at your purchase - has nothing to do with the age of the property, and is based on the depreciating portion of the purchase price, which excludes the land. You are correct, however, that the physical structure depreciates with age, and in some cases the property is functionally obsolescent, and to rectify this would require amount of capital which cannot be supported by the market, which makes the property financial obsolescent. This is separate from taxation, though...
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
11y
The depreciation for the "improvements" starts when you buy the house. Age doesn't matter. The value is established when you buy, then decreases with deprecation. The assumption is the improvements are "wearing out" over the next 27.5 years vs. the value when you purchased.
When you make new capital improvements and repairs, two situations might apply. If this is a rental, improvements and repairs made before its rent-ready add to your basis. Depreciation on those starts when you spend the money.
After its rent ready, repairs are expenses and can be deducted in the year you spend the money. Capital improvements, like roofs and flooring, get depreciated over multiple years. Different items have different schedules. So, you track each one individually and take the depreciation as its allowed. Flooring, for example, has a five year depreciation schedule.
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
11y
To add to the two excellent answers above, when you close on the property, your CPA will assign a percent of value to the land and the rest to the structure. So, let's say you buy a $100K house. Your CPA might assign 20% to the non-depreciating land (dirt is always dirt and therefore doesn't lose value with age even though it might based on desirability) and the remainder is assigned to the structure which does wear out with age. You take that 80%, in this case $80,000 and divide it by 27.5 years, giving you $2,909.09 per year in write off.
These are all great answers, thank you so much. I feel like I just made some money being that I thought the 27.5 years had to do with the age of the house and it doesn't!