Depreciation calculation based on purchase price or recent appraisal price?

Question

New investor- I am renting my first property (my first home). My accountant - who is not real estate specific per say- sent me my schedule E forms with real estate tax calculation. The purchase price of the home I am renting was 885,000. It was appraised last year at 1,200,000.

Is depreciation calculated based on the purchase price? I was hoping it would be based on the recently appraised price?

Thanks for fielding this question.

Raj

Is depreciation calculated based on the purchase price? I was hoping it would be based on the recently appraised price?

Thanks for fielding this question.

Raj

Jeff Nash · Answer

@Raj Shah I assume this was factored in, but just in case it was not there should be an allocable amount for land which is not depreciated. I've seen more than a fair share of returns where there are buildings and improvements with no land basis.

Hunter Reed · Answer

Raj, take the purchase price and divide it by 27.5 years and you should get a relative amount that of which you can depreciate on your taxes.

Ricky A. · Answer

Depreciation is always based on purchase price.

Think of it this way: Business assets (whether a piece of machinery or a house) are purchased to generate income. These assets are assumed to have a useful life over which they will produce that income. Therefore, the IRS lets you expense the cost of that asset (i.e., the purchase price) over the assumed useful life of that asset.

So, I don't think of depreciation as some magical gift from the IRS. To me, it's simply a recognition that the cost of the asset should be spread over the assumed useful life. However, depreciation is especially great when it comes to real estate because, unlike machinery and other assets which tend to go down in value over time through use, real estate goes up in value while we still get to use the deduction for cost.

Samantha Baker · Answer

It's always based on the purchase price.

Don't forget to add the closing costs into the basis of your house. So if it was 885K with 10K of closing costs you should be depreciating 895K

Basit Siddiqi · Answer

It is based on purchase price not appraised valuation.

Raj Shah · Answer

okay great- that a is very helpful!

I so appreciate this group- thanks for your help.

Depreciation calculation based on purchase price or recent appraisal price?

Depreciation calculation based on purchase price or recent appraisal price?

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