Author Topic: Calculating rental property depreciation  (Read 2216 times)

v8rx7guy

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Calculating rental property depreciation
« on: January 04, 2016, 11:40:48 PM »
I was looking back at my old tax returns and realized that the depreciation value I had been using wasnt as accurate as maybe it should be (not terrible, but should be addessed in my favor).  I did some reading and what I found was you need to calculate the value of the actual home / complex you are renting (usually propery value minus land value) and divide it by 27.5 .  My question is where is the best place to find an accurate land value?  I can look up the property on my county's assesor website but im not sure I fully trust those values... I am not sure how normal this is but typically it is understood in my county that home prices are undervalued purposely by 10-20% by the assessor so that home owners cant claim they are being over charged on proprty taxes.  Is there a better or more accurate place to get the land value?

In terms of the total property value,  I read that you must take the lower number between the original purchase price and the current market value.  I bought the duplex as a fixer upper with a business partner in 2007 for around $200k and refinanced around 2010 at $240k to buy him out.. is a refinance th same as a sale from a depreciation stand point? Market value is carrently is $260k.

Drifterrider

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Re: Calculating rental property depreciation
« Reply #1 on: January 05, 2016, 06:04:11 AM »
Take the total purchase price (from your HUD-1).  Take the land value percentage, based on the tax records at the time, off the total purchase price.  The remainder, the value of the structure, is your depreciable base.

For Example.  I bought a house.  The land value per the tax record at that time was 9% of the total assessed value.  Therefore, 9% of the total purchase price should be attributable to the land value and is not depreciable.  The remaining amount should be depreciated over the next 27.5 years (residential).  If you make capital improvements you depreciate them according to the IRS schedule.

It is never too late to correct your mistake just make sure to keep good notes on why you are changing the amount depreciated.  If you get audited you have your notes to explain the change.

Vee2001

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Re: Calculating rental property depreciation
« Reply #2 on: January 05, 2016, 09:17:23 PM »
A couple notes.

1) Depreciation schedule is typically set by the original purchase price.  Seems like the only "lower of current value or purchase price" situation you mentioned is if you lived in the property before turning it into a rental.  When it converts to the rental, you take the lower of the two values, calculate the depreciation and it is fixed at that amount moving forward.  As you mentioned, 'Improvements' divided by 27.5 is how much you depreciate per year.  Once a deprecation schedule is started, it should not change year to year.  Certain things reset the depreciation like death of the owner.  There is a "stepped up basis" to the full market value on the day they died and you can restart depreciation from the new value.  Just refinancing a mortgage does not change your depreciation schedule.  Talk to a professional to see if buying out a co-owner does anything, I don't know.

2) You do not need to go off of the tax record to decide your 'Improvement' value to depreciate.  Looks like the way it is calculated varies county to county, state to state.  For my properties, the assessor always  puts the values at 50% land/50% improvements.  You need to decide the fair breakout between land and improvements and use that.  Be realistic, use numbers you can justify to the IRS if they come calling.  For example, I bought a $1M 4-plex.  Assessor listed it as $500k Land / $500k Improvements.  After talking with my tax adviser and looking at comparable real estate for the area, we agreed that $300k Land / $700k Improvements was a fair valuation and justifiable.  $700k / 27.5 = $25,454 per year in depreciation.  That should not change for as long as I own the property.

v8rx7guy

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Re: Calculating rental property depreciation
« Reply #3 on: January 08, 2016, 02:00:40 PM »
Thank you for the reply.  The reason I feel I need to change the deptreciation value is because it was a Duplex that I lived in half and rented out the other half for 7 years.  This meant I could only depreciate 50% of the duplex value because I only rented 50% of it.  Well, that was all fine and dandy, until I moved and started renting 100% of it.  In this case, you would think that it would be possible to at least change the rented percent value on my tax return for 2015 to properly indicate this?