1. What is Real Estate Depreciation?

Real estate depreciation is a tax deduction that allows property owners to recover the cost of income-producing property over its useful life. It represents the wear and tear, deterioration, or obsolescence of the property.

2. How Depreciation is Calculated

The standard depreciation formula for real estate is:

Where:

• Cost Basis - The original value of the property (building only, not land)
• Land Value - The value of the land (not depreciable)
• Useful Life - IRS-defined period (27.5 years for residential, 39 years for commercial)

Explanation: Only the building value (cost basis minus land value) can be depreciated, spread evenly over the useful life of the property.

3. Importance of Depreciation

Details: Depreciation reduces taxable income while providing a non-cash expense. It's a powerful tax benefit for real estate investors that can significantly improve cash flow.

4. Using the Calculator

Tips: Enter the total property cost basis, the allocated land value (typically 15-25% of total value), and the useful life (27.5 years for residential rental properties).

5. Frequently Asked Questions (FAQ)

Q1: Why can't land be depreciated?
A: Land doesn't wear out, become obsolete, or get used up, so IRS rules prohibit depreciating land.

Q2: What's the standard useful life for rental properties?
A: Residential rental property: 27.5 years. Commercial property: 39 years.

Q3: When does depreciation begin and end?
A: Begins when the property is placed in service (ready for rent). Ends when you've fully recovered your cost or you stop using it for business.

Q4: What happens when I sell the property?
A: You'll need to recapture depreciation (pay taxes on accumulated depreciation at a maximum 25% rate).

Q5: Can I accelerate depreciation?
A: Yes, through methods like cost segregation studies that identify shorter-life components (5, 7, or 15 year property).