Depreciation can be one of the most confusing aspects of real estate to wrap your head around, but with this guide on how to calculate depreciation, you’ll get it all figured out in no time. If you’re new to the world of business, real estate, or accounting, you may be unaware of what depreciation is and how it works. Simply put, depreciation refers to a decrease in the value of an asset over time. The depreciation rate, or the amount at which an asset depreciates, will depend on the property’s quality and usability. Here’s how you can calculate depreciation for your property so that you can reduce your taxes and keep more of your money every year!
What is depreciation of property?
Simply put, depreciation is an accounting method for allocating a fixed asset’s cost over time. It helps reduce your tax burden by factoring in wear and tear on capital investments over time. In real estate terms, depreciation is when a decrease in the value of a property is recognized for tax purposes. In short, you can claim that certain expenses—such as repair and maintenance—taken over time have decreased your asset’s value. When you figure out how much depreciation you’re able to deduct, it will help keep more of your profits in your pocket and less with Uncle Sam.
What is the easiest way to calculate depreciation?
The straight-line method is proven to be effective and easy. The straight line method is a depreciation of property in which equal amounts of depreciation expense are recognized each year during an asset’s useful life.
So, in this method, you subtract the initial cost of the property from the estimated salvage value of the property and then divide it by the useful life of the property.
How to Reduce Depreciation On Purchased Real Estate?
One of the best ways to reduce depreciation on your real estate is to buy depreciated property. While it might seem silly, if you’re willing to spend money on a property that has already been hit with depreciation then you can reap major savings. Unfortunately, a lot of properties will require fixes or renovations before they are even habitable—meaning that buying depreciated real estate still involves investing a good chunk of cash upfront. That said, when you consider how much more affordable depreciated property tends to be than other options (not to mention how much lower your tax burden could be), it’s hard not to see how purchasing depreciated property could be a great way for investors looking for their first piece of real estate.
In summary, depreciation is used to determine how much value an asset has lost over time. Once you’ve depreciated a property, it’s also a good idea to review its current price and adjust for any significant changes. As you can see, depreciation is a complicated and confusing concept. I hope that with these tips, you are better equipped to calculate depreciation for your property. If you still have questions, you know what to do.