How to Calculate Depreciation on Rental Properties

Gross Depreciation

Depreciable Building(s) $221,971
÷ Depreciation Period ÷ 27.5 Years
Gross Depreciation = $8,072

Let's walk through calculating Depreciation for Typical 25% Down Payment Gainesville, Florida Rental Property.

You can only depreciate the cost of the buildings (not the land). So, first, we will need to determine how much of the purchase price is allocated to the buildings and how much is allocated to the land.

For Typical 25% Down Payment Gainesville, Florida Rental Property, we've assumed that 15% of the original Purchase Price was allocated for the land and 85% for the building(s). This can vary significantly depending on the property and location. You can often get a defensibly percentage by looking at the public records and specifically tax calculations for your property. Or, check with your local accountant/CPA to find out what they typically use in your market.

Back to Typical 25% Down Payment Gainesville, Florida Rental Property, we've assumed 85% of the original Purchase Price of $261,142, so we're estimating that that the depreciable building(s) for this property are valued at $221,971.

Depreciable Buildings

Purchase Price $261,142
× % Depreciable Buildings × 85%
Depreciable Buildings = $221,971

Now that we know the value of the buildings at time of purchase (excluding the value of the land), we can move on to calculate the actual gross depreciation.

To do that we need to know if this is a residential property or a commercial property to determine the period we can depreciate the value of the buildings over.

  • Residential properties: 27.5 years
  • Commercial properties: 39 years

Typical 25% Down Payment Gainesville, Florida Rental Property is a residential property so we're going to depreciate the cost of the buildings over 27.5 years. After 27.5 years, there will be no more depreciation to take on this property.

Gross Depreciation

Depreciable Building(s) $221,971
÷ Depreciation Period ÷ 27.5 Years
Gross Depreciation = $8,072

This $8,072 is the gross depreciation benefit or, in layman's terms, how much income we can offset and not pay income taxes on by owning this rental property.

IMPORTANT NOTES: Here are a few important notes.

  • When you sell this property, there is a depreciation recapture tax where you will pay taxes on the depreciation taken on this property.
  • Taking depreciation is not optional; if you don't take it, the IRS assumes you did and you will start have a depreciation recapture tax liability. You can defer
  • You can choose to utilize a 1031 tax deferred exchange to defer having to pay depreciation recapture tax on the sale.
  • You may want to accelerate depreciation to improve short-term Cash Flow from Depreciation™.

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