How is depreciation handled at a refinancing?

4 Replies

Hello!  I want to pose a hypothetical example.  If I buy a rental property for 200K where land is valued at 50K and building at 150K. then i can depreciate the building at about 3.6% annually or $5455 in dollars.  Lets say the building increases in value to 300K and I do a refi.  Lets say the building is now appraised at 240K, land at 60K.  Does the depreciation start fresh on the 240K or now $8727 annually?  Or does it stay at $5455 until the building is sold?  (I am new and have not done any deals).

As long as you own property, you continue depreciating it on the original basis, till it's 100% depreciated. Increase or decrease in value, refinancing has nothing to do with it.

If you do improvements, you'll have additional depreciation accounts, with it's own life. Let's say you do an addition, it cost you $50,000, you'll have another depreciation account for the addition, in this case $50,000 depreciated over 27.5 years, beginning the year you did the addition. So now you have one depreciation account for the building, $50,000 starting the year you bought the place, and another one, $50,000 for the addition starting the year you did the addition. 

In my case, I bought my properties in the early 80's, depreciation laws changed during the Reagan era, so my original building was depreciated at 15 years accelerated depreciation, allowed by law at the time, and the improvements were done some years later and depreciated at 27.5 years straight line, based on the change in the law.

thank you to everyone who responded.  I especially appreciate frank chin's illustration.  this cleared up the issue well.  thank you all!