Posted by E.Eka on February 04, 2004 at 08:25:34:
on what your tax strategy is. Depreciation allows you to take deductions over time. And expensing will give you a great current deduction. One thing to remember is that there is a recapture of depreciation depending on your particular situation.
Depreciation for Rentals - Posted by rehabber_pa
Posted by rehabber_pa on February 03, 2004 at 18:09:41:
I just bought a townhouse at a Sherrif Sale
for a good price (60% of ARV).
My question - If I make it a rental and depreciate
from current value (100k) down to zero over
the current 24 1/2 year time period (per IRS rules) -
is it “straight line” depreciation - ie $100,000 divided
by 24 1/2 years divided by 12 months per year = approx
$340 per month - Do I depreciate this same $340 per month,
month after month, or is the depreciation somehow
“exponential” - ie. I depreciate more (say $400) per month
at first, then it’s a sliding scale down to less and
less depreciation each month.
Thanks in advance for any insight.
Re: Depreciation for Rentals - Posted by phil fernandez
Posted by phil fernandez on February 04, 2004 at 06:18:44:
David and Nate are correct. I read your post fast and forgot that you bought the place at 60% of value. You can only depreciate the basis.
Re: Depreciation for Rentals - Posted by Nate(DC)
Posted by Nate(DC) on February 04, 2004 at 01:04:46:
David is right…you depreciate from basis, not from “value”, and basis roughly is defined as what you paid for it, plus capital improvements…excluding land of course.
NT
BUT if you bought for 60% of value… - Posted by David Krulac
Posted by David Krulac on February 03, 2004 at 21:15:14:
which would be $60,000 you can only depreciate that value minus land value over 27.5 years. Say the lands worth $5,000 then the buildings worth $55,000 and the yearly depreciation is $2,000 per year.
Re: Depreciation for Rentals - Posted by phil fernandez
Posted by phil fernandez on February 03, 2004 at 19:04:09:
Depreciation of rental property is not 24.5 years. It’s 27.5 years and yes it’s straight line.
If your rental property was bought at $100,000 you can’t depreciate the entire amount of $100,000 because a portion of that value has to go to the value of the land which is not depreciable. Lets’ say that the land value is 10% of the total so the land would be $10,000 and the actual building on that land would be 90% or $90,000.
It’s the $90,000 that you would divide by the 27.5 years to get you to the amount of your yearly depreciation. In this example $90,000 divided by 27.5 years would be $3,272 per year that you could use for depreciation.
The sliding scale for depreciation you talk about went out with the 1986 tax reform. Before than you could accelerate depreciation and the years to do this weren’t 27,5, but 15 years and than 19 years after that up until 1986.
But do consult a good accountant on this. He will get you straightened away.
Re: Depreciation for Rentals - Posted by chris-atl
Posted by chris-atl on February 03, 2004 at 18:58:31:
First of all, it’s 27.5 years, not 24.5 years. And if the value of the total property (house + land) is $100k, then you have to deduct the value of the land since land is not depreciable. You can use 15-20% for the land. So your depreciation assuming 15% land value would be $85k/27.5 = $3,090.91/yr.
Re: BUT if you bought for 60% of value… - Posted by rehabber_pa
Posted by rehabber_pa on February 04, 2004 at 08:26:47:
thanks for clarification.
I paid $60k at sheriff sale.
Will put about $16k into it (paint, carpet, minor rehab)
I estimate closing costs at $4 k
So, would basis = 60+16+4 = 80k or dont closing costs
count towards basis.
Also - would it be better to roll the fixup costs into the basis (loan companies
will loan me up to 80k on this property since
LTV at 80k is still only 80%)
or declare only a 60k basis and expense the 16k rehab
this year?
Re: BUT if you bought for 60% of value… - Posted by rm
Posted by rm on February 04, 2004 at 06:47:18:
So, then, the trick is to work as many of your capital improvements into your purchase agreement, so as to raise the basis?
Or, with the latest law changes, would it be wiser to expense these things?
Re: BUT if you bought for 60% of value… - Posted by David Krulac
Posted by David Krulac on February 04, 2004 at 10:49:00:
you might be better off trying to expense the 16k this year rather than depreciating it over 27.5 years.
Most closing costs can be rolled into basis.