Depreciation - How to Account for on Income Statement?

Question

Hi,

I'm working on the financials section of my BP.  How do you calculate and include depreciation on the income statements?

If I use a depreciation calculator and calculate an annualized deprecation amount of $3k, should I add this is a month gain...  I'm confused.

The properties will be SFR with a buy and hold.

Thanks,

-billy

Bill Jacobsen · Answer

Depreciation is an expense and as such it reduces your income on a properly prepared income statement. It is also a reduction on your tax return. Because of this most buy and holds show little income or even negative income. The Government get their taxes when you sell the house because the basis or value has been depreciated down even though the house has increased in value.

When analyzing property most investors do not include depreciation. They try to project NOI and a proper cap rate.

I hope I have helped rather than confused you.

Good Luck.

Bill

When analyzing property most investors do not include depreciation.  They try to project NOI and a proper cap rate.

I hope I have helped rather than confused you.

Good Luck.

Bill

John Blackman · Answer

Check with your accountant to make sure claiming it makes sense for your taxes.  For some fun late night reading:

http://www.irs.gov/publications/p527/ch02.html#en_US_2013_publink1000219026

Simon Campbell · Answer

@Jeff  S. What you are describing is not labeled as "depreciation" but is called capital reserves. This item will show up on the cash flow statement. Every property owner should factor in a monthly amount to cover large ticket repair items such as appliances, floor coverings, HVAC, roof etc. Generally it is not calculated using a depreciation table but rather based on the cost to replace divided by the life expectancy of the item.

Jeff S. · Answer

It depends in what context you are referring to. Your income tax is looking for one thing while you may want to use it as kind of a reserve for things that are wearing out. If you are depreciating your appliances you could expense those and put that amount away for replacement. Most though would just call it a reserve for items to be replaced.

Simon Campbell · Answer

Depreciation is not an income statement item. It is an intangible expense that impacts primarily your income taxes. For example, if you calculate that you are loosing $3k per year in depreciation, how do you physically prove that you have lost that amount of money? No money has left your wallet. If you have maintained the property, then the actual cost of depreciation is negligible.

Brie Schmidt · Answer

@Billy Raz - Depreciation is accounted for on your Schedule E - It basically lowers your taxable rental income.  So it would not be fully added as a gain - but an overall reduction in your taxable income

Depreciation - How to Account for on Income Statement?

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