Depreciation means the reduction in the value of your real estate property as it deteriorates with age.
Generally, as an investor and a business owner, you pay an annual tax for your real estate property and the income it generates. Real estate depreciation reduces the amount you pay for your business’ tax.
However, this reduction in cost can only be applied to a building or a physical structure, not to land properties and other non-depreciating properties. When investors appropriately describe the depreciation of a building and other similar assets, which means a reduction in his income, it will lead to a lower income tax payment.
Identify which needs depreciation
Determine the number of years and the depreciation method which you need to use. To calculate for the depreciation, such real estate property must be utilized in your business and generates means for you.
Then confirm the time period it has been used for such purpose. To qualify for depreciation, it should be in use for over a period of one year.
Add up the acquisition cost
To determine the root cost that you will use for depreciation, you need to add to the purchase price the acquisition cost of your real estate property. This cost will include the abstract fees, cost you spent on surveys, legal fees, the cost spent for repairs and improvements of the real estate property (to prepare it for use) and the title insurance.
The acquisition cost can also include the interest you paid to transfer the title from its previous owners to yours.
Deduct the property value
Remember that land value is not subject to depreciation. Subtract the land value wherein your real estate is situated except if you are renting the property separately.
You can always consult your city assessor to know the current value of a land if you have no idea on this.
Divide the result
The Straight Line Method of calculating the depreciation value will involve dividing the total base cost, or the final result you achieved using the above computation, with the total lifespan of the property.
Distribute the months during the year when the property starts to operate in a business and the time which the property is fully depreciated.
Multiply the cost
Multiply the root cost for the real estate property with the regular percentage indicated for other methods used to calculate for the depreciation.
The straight line method of calculating the depreciation cost of a real estate property suggests the straight line reduction in the value of a property. The depreciation is evenly stretched throughout the total period the property existed.
It is also noteworthy that you refer to the Internal Revenue Service (IRS) guidelines and earn more insights on how to calculate the depreciation of your real estate property effectively. Then again, correct depreciation of the real estate property which you have acquired can greatly help in reducing the price you pay on your income tax.