Depreciation 102: Real Estate Depreciation

16 October 2013 / Uncategorized / Comments Off on Depreciation 102: Real Estate Depreciation

Welcome to another edition of Tuesday Tidbits where we make tax and accounting simple. I'm your host Charles D. Shapero, CPA with Widget Bookkeeping & Tax, and today we're going to talk about the depreciation of Real Estate. A lot people, a lot of our clients buy rental real estate, whether it be commercial or residential. And that's really how they're broken out. When you depreciate residential real estate, say we have an apartment building that we're renting, that buidling gets depreciated over 27 1/2 years, if you're doing commercial, like a strip mall, that is 39 year property. But that's not all, I just kinda lumped them into two baskets. When we buy a rental house, there's a couple things we're buying, we're buying the house, we're also buying land, the land that that property sits on, we're also buying some appliances in that building, and maybe some land improvements. So now I've just chopped this one asset that we said was going to be depreciated over 27 1/2 years, and I've chopped it up into several different categories The appliances, appliances when you buy them are 5 year assets. That's a lot more rapid write-off than taking 27 1/2 years. So to the extent that we have appliances we probably want to break them out. I also mentioned land. Land is not as happy as appliances because land we can't write-off at all, land does not depreciate. So let's just say we spend $200 grand on this house, maybe $20,000 of that relates to the land, which we'll never be able to write-off, until we sell the property. So no depreciation on land. I mentioned land improvements, that could be like a parking lot or a fence. Those items are written off over 15 years, so we don't have to wait 27 1/2 years, to write them off. Commercial has many of the same items, but they're basically 39 years. If you buy a big enough property, say we buy a strip mall for 1/2 a million dollars. One of the things we can do to accelerate our depreciation and speed it up, is to hire a cost segregation specialist. What that is, is he's an engineer that will go in and instead of seeing this building a 39 year asset, he'll chop it up into pieces like I did over here at the residential, he'll say oh those ceiling tiles, those are 5 year property, and this electrical runs this, that's 5 year property and this is 7 year property. So instead of calling it 39 years, we're writing different buckets of items over off shorter periods of depreciation. Which really accelerates our write-off. This concludes today's Tuesday Tidbit, see you next Tuesday. Widget Bookkeeping & Tax Know More, Keep More