Claiming Depreciation for Tax porposes.

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Claiming Depreciation for Tax porposes.

Phineas Howie
Catskill, NY · Member since 2017 · 16 posts · 24 votes

Somewhat confused here, how can a property appreciate,  yet one can claim depreciation for tax purposes. I heard Depreciation is a bigger factor for higher end property just how big is factor would it be for say a 350-400 thousand dollar home? 

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y

@Phineas Howie, it's tax write off that is a game of pretend.  The IRS let's you pretend that the value of the structure is losing value every year.  So in theory at the end of 27.5 years as @Zoltan Fagyal said the house and land should only be worth the value of the land.  

But we all know that isn't true generally over the long term. The tax write off the IRS gives you for pretending the value of your investment property goes down every year must be re-paid if you sell and the house has actually appreciated or not really depreciated. 

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  • Zoltan Fagyal
    Bellingham, MA · Member since 2014 · 59 posts · 13 votes
    9y

    You're depreciating the actual cost of the property. Generally, it's done over 27.5 years. 

    The caveat,  if you sell it without a 1031 exchange then you will have to pay capital gains tax on everything you have written off and claimed. 

    I hope this clarifies it a little.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Phineas Howie, it's tax write off that is a game of pretend.  The IRS let's you pretend that the value of the structure is losing value every year.  So in theory at the end of 27.5 years as @Zoltan Fagyal said the house and land should only be worth the value of the land.  

    But we all know that isn't true generally over the long term. The tax write off the IRS gives you for pretending the value of your investment property goes down every year must be re-paid if you sell and the house has actually appreciated or not really depreciated. 

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  • Phineas Howie
    OP
    Catskill, NY · Member since 2017 · 16 posts · 24 votes
    9y

    @Dave Foster

    Wow, So you're saying that after 27. 5 years one would not be paying taxes on a home; only on the land? Do most home owners even take advantage of this for their primary residence?

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Phineas Howie,

    Depreciation is essentially a tax benefit that investors get/must take advantage of when they acquire property held for rental, investment or business use. It allows investors to "write-off" the value of the purchase allocated to any building or structures as a tax deduction to help offset revenue.

    It does not apply to a primary residence or a second home.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Phineas Howie, It's not quite like that.  We're not talking about property taxes of course. And the depreciation is a tax write off you get every year on the building portion of an investment property.  

    At the end of year 27.5 you actually have written off the entire value of the structure and there is no more write off available.   If you purchased a property that was 20K of land and 100K of building and held it for 27.5 years at that time your basis in the property would be $20K.  So if you sold it for $120K  you would then recognize a gain of $100K and would pay depreciation recapture tax on the write off you received over the years.

    Depreciation is a wonderful write off.  But if not managed carefully it can bite you at the end.

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  • Phineas Howie
    OP
    Catskill, NY · Member since 2017 · 16 posts · 24 votes
    9y

    @

    Dave Foster

    Thanks so much, that makes it much more clear. So the starting value we are talking about here, is the tax assessment value? Or can it be the appraisal for the full market value? 

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  • Don SpaffordPro Member
    Investor · Idaho Falls, ID · Member since 2016 · 912 posts · 629 votes
    9y

    To add to this thread, I've been wondering, where do you find the value of just the land? Does the county assessor have this? Since you depreciate the building, not the land, you need to know the value of just the land but where/how do you get that?

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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    9y

    @Phineas Howie, the "starting value" is known as your tax basis, and it is how much you paid for the property (including certain costs associated with the acquisition of the property).  This is known as your "cost basis."  Of course, land cannot be depreciated, so you have to bifurcate your total acquisition cost between land and building and perhaps even into more components through what is known as cost segregation.

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