depreciation |diˌprē sh ēˈā sh ən|
a reduction in the value of an asset with the passage of time, due in particular to wear and tear.
• decrease in the value of a currency relative to other currencies : depreciation leads to losses for non-dollar-based investors | a currency depreciation.
There are many ways to define depreciation when we talk about real estate. We will cover some of the most important forms of depreciation in today’s real estate terminology.
To begin with you have The depreciable life of the asset (property). For tax purposes this would be the number of years over which the cos to of the property can be spread. Most buildings are spread over a 27 1/2 year depreciable life span in the accounting world.
Parts of an asset(property) can have different depreciable lives for appraisal purposes though. Say you have a multi-tenant apartment complex that you are having apprised and the Appraiser determines that the remaining depreciable life of the roof is only 12 years.
During this discussion it will be important to know that depreciation can be used in a variety of different ways and for a variety of different purposes.
Depreciable Real Estate is the property that is subject to deductions for depreciation. This can include property for trade, investment and business. This is the property that would be subject to the allowance under IRS code section 167. This is most commonly referred to as the straight line depreciation method that uses the 27 1/2 remaining depreciable life.
Depreciation in accounting is when you estimate the useful life of an asset. There are many depreciable lives that can effect the different types of assets that you are depreciating, so consult with your account on the type of asset you want to depreciate and the correct life to use when calculating the depreciation.
Depreciating in Appraisals is most commonly used to determine the charge against the reproduction cost (new) of an asset for estimation of the wear and obsolescence for economic, physical or functional depreciation.
Depreciation methods In the graphic in this post you can see that there are several depreciation methods that can be used. Each of these has a name. There is Straight line, adjusted tax basis, double declining, sum of years digits/All of these are applied differently and for different reasons.
It is important that when you are investing in real estate that you have a basic knowledge of the different types of depreciation available and the different ways that they can be applied to your real property and personal property assets. It is also a good idea to have a competent CPA and Real Estate Attorney in your contacts network to help you answer any questions you might have when investing in property.
Remember, building your contacts networks and knowing the numbers will help you maintain a successful investing career and reduce the risk of doing a deal that is less than profitable. We are all about the profits.