Question about how depreciation is calculated

7 Replies

Hello,

I have a simple beginner question about depreciating a building. If I purchase a property for $335k, and according to the county website the value of the property is $290,900 with the building having a value of $247,300 (85% of the value of the property). When calculating depreciation do I use $247,300 as the value of the building? Or, so I use 85% of $335K ($284,750)? I hope this makes sense. Thanks. 

Account Closed , 

You would use 85% of the 335k. 

Also, dont forget to add other costs to your depreciable basis of the house such as:

1) if any improvements were done to the house

2) The following items are some of the settlement fees or closing costs you can include in the basis of your property.

  • Abstract fees (abstract of title fees).
  • Charges for installing utility services.
  • Legal fees (including title search and preparation
  • of the sales contract and deed).
  • Recording fees.
  • Surveys.
  • Transfer taxes.
  • Owner's title insurance.
  • Any amounts the seller owes that you agree to pay, such as back taxes or interest,
  • recording or mortgage fees,
  • charges for improvements or repairs,
  • and sales commissions.

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

3) if there were other costs incurred to acquire the house such as if you spend money for tax advice, tickets to fly to look at the house( or milage)  and such also gets added to the basis

Good luck

Thanks everyone!

I had one more small question that is related. Does the depreciation of the property apply to local income taxes as well? For example, a city tax? 

Originally posted by Account Closed:

Thanks everyone!

I had one more small question that is related. Does the depreciation of the property apply to local income taxes as well? For example, a city tax? 

Are you asking if you can deduct depreciation for the purpose of local taxes?

Generally yes, if they are taking you on your net income. 

Originally posted by Account Closed,

Thanks!

When you say "Abstract fees", do you mean "title fees"?

Are any of the following deductible?

  • Lender fees
  • Appraisal fees
  • Lender's title insurance
  • Realtor transaction fees

Yes, Abstract fees are fees to abstract the title so I am guessing most of the people call them the title fees. 

Lenders fees are not deductible. they have to be deducted over the term of the loan.

An appraisal that is done by you is added to the basis if the property. If the appraisal is done because the lender required it, it is deducted over the term of the loan.

Title Insurance is added to the basis of the property.

By realtor transaction fee, do you mean agent's commission? That is the seller's expense. Buyers normally dont pay them. If you did, you would add them to the basis of the house.