Depreciation question in regards to damages or repair.

General Landlording & Rental Properties
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Depreciation question in regards to damages or repair.

Landon Elscott
Investor · Newton, IA · Member since 2012 · 89 posts · 39 votes

Well, I've been snooping around on here for awhile and am in the process of learning everything I can know and being completely prepared as I make the transition into becoming a landlord. I haven't purchased anything yet or even made an attempt to, and am just learning the laws, tips and tricks, and trying to find what I feel will be a good investment using the information I've read here.

I understand the concept of depreciation; however, I'm a bit confused in terms of how it applies to tenant damages. For instance, tenants are required by law to only pay damages based upon the remaining life that the particular object has. So if a carpet has a life span of 7 years, and a tenant damages carpet with 3 years left on it, I can only assign them damages for those 3 remaining years.

But what about a situation where the carpet may have already fully depreciated, but in reality is still in really great shape. For instance, when I first got married, my wife and I rented an older farmhouse. The carpet was about 10 years old in one of the rooms and obviously outdated in style, but it was very well kept up and was in better condition than many of the other properties we looked at with carpet only 5 years old. That particular room had served as a formal dining area, and I'm assuming tenant probably rarely used it.

I would never have considered damaging the carpet, but what would have happened if my dog were to have chewed it up or if another tenant were to damage it in that property or any other that someday I may own. I mean, by all considerations the carpet was in excellent condition but would have technically past its lifetime and therefore seems to me as though it could be debated as to if a tenant were liable for any damages, under the provision that their damages would be less the amount that the carpet depreciated.

Say the carpet cost $500 when it was brand new and had a life of 5 years. Each year it depreciated $100 under straight line depreciation. So on the 6th year, if the tenant damages the carpetting, they'd be liable for $500 but then minus $500 from the 5 years of depriciation, meaning they wouldn't be liable for anything.

I appreciate all the help, including that from all the other posts I've been snooping on!!!

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y

    Tenant damage has nothing to do with the depreciable tax basis of personal property like carpeting. It's a necessarily subjective assessment or the condition of the property on the day you gave them the keys, versus the day they returned the keys. Was the wear & tear excessive for the period of the tenancy? You will need to be fair, err on the side of giving the tenant the benefit of the doubt, and take before-and-after pictures of all aspects of the property.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    Landon,

    That may not entirely be true. This can be a state by state thing as to the liability. The fact that it is depreciable has nothing to do with it. If they cause the damage they have to pay for it. There is not limit to their liability. Just because it has been past its useful life it is still damage they caused.

    For instance in another thread we were talking about a washer/dryer door. Even if the unit was 10 years old, the tenant still caused damage. The only thing that can change this is if they state has a limit on damage liability which is very unusual.

    -Steven the Tax Guy

    [email protected]224-381-2660
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  • Landon Elscott
    OP
    Investor · Newton, IA · Member since 2012 · 89 posts · 39 votes
    14y

    Ah, perhaps I have misunderstood. I had seen this link: http://www.rentlaw.com/repairs/carpets.htm and perhaps did not read it correctly. I have read the Iowa rental laws and they really don't cover depreciation aspect of damages.

    I mean, I guess in my head I questioned it, because it didn't quite seem right that someone could ruin property just because it was old and not be held responsible. I could see just about any tenant using that to their benefit, but obviously it was just confusion on the way I was interpreting it.

    If that's the case though, why are Landlord's out there charging damages based upon depreciation as described in the first link?

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    I am aware that there are places in the state of MD that have the depreciation deducted from the value - they do something akin to what insurance companies call "actual cash value" (ACV) claims.

    Some web sites out there try to be as generic as possible to cover all possible cases - resulting in things that are very specific (and very local) to be less than representative ...

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