Depreciation Calculations-please help to figure it out

[Mary Jay]

Hey guys,

I feel like Ive always struggled with depreciation concept...

So, Ive been googling it, and here is what I found:

Let’s say you buy a single-family home for $200,000. The tax assessor’s estimate of the land value
is $75,000, and the building value estimate is $125,000. Your
depreciation expense that you take each year against rental income would
be $125,000 divided by the IRS allowed 27.5 years of useful life (residential real estate)
for a depreciation expense each year of $4,545. So thanks to that
depreciation expense, you are saving (assuming you can use passive
activity losses) $4,545 multiplied by your marginal tax rate (which is a
topic for another day). This could be tax savings from $1,000 to $2,000
per year, just for the depreciation amount.
https://www.zillow.com/blog/ta...

So, do understand correctly, if I am in a 30% tax bracket, then that $4,545 I need to multiply by 0.3 (because of 30%) to calculate how much tax depreciation will save me? So:
$4,545  multiply by 0.3 =$1350 less I will pay in taxes? Correct?

Does it apply to my house as well? Or only rentals?

[Natalie Kolodij]

Originally posted by @Mary Jay:

Originally posted by @Natalie Kolodij:

Depreciation is only on rentals. 

You would not take the tax assessors $125k value and depreciate that. 

If assessor= $75k Land, and $125k building 

Then 62.5% of the value is building 

You apply 62.5% to your total cost of buying the property. So if you paid more your depreciation will be more, or if you paid less it would be less. You're just using the ratio from the assessor, not actual figures. 

I'm also not sure I'd directly apply the tax savings to depreciation. 

If you have high income on a property it may not have a loss, even after depreciation. Or the loss could be LESS than the depreciation amount, or you could show income. 

Thank you. Can we put it into numbers? Its easier for me to understand it then...

So lets say bought property for 200K and its worth 200K, 62 % is the value of the building, which is 125K...Then 125K divide by 27 years, right? So we get 4.6K, which is what I can depreciate per year, right?

Then, if I am in a 30% tax bracket, then lets say I make 100K per year, then my taxable income will be 100k minus that 4.6K=95.4K is my taxable income, right? Is that how depreciation lowers my taxable income?

The depreciation calculation is correct. 

BUT what I'm saying is whta if you make $20k in rents, other expenses are 10k, and then after you deduct 4.6k depreciation you may still HAVE income- not a loss. 

Depreciation doesn't direclty guarantee you tax savings. Ideally, and often, it's what allows you to show a loss- but not always.n