Property tax depreciation allows owners of business properties to write off the value lost over time, reducing their annual tax burden. The straight-line method is used to calculate depreciation over 27.5 years for residential buildings and 39 years for non-residential buildings. Land is not depreciable, and the building’s use determines the depreciation period. Depreciation expense can be written off on tax returns, but it results in higher capital gains taxes when the property is sold.
Property tax depreciation refers to the amount of value lost over time by property owned for business purposes, such as rental property or a store. Owners of such properties can write off the depreciation of the building that the business maintains to reduce their annual tax burden. When calculating property tax depreciation, the original cost of the building is depreciated using a straight-line method over a period of 27.5 years if the building is residential, such as an apartment complex, or 39 years if it is non-residential, such as a store. . While this depreciation helps the investor in their annual tax returns, it works against them when the property is sold because the lower value of the building means higher capital gains taxes must be paid.
Depreciation occurs when a business asset experiences normal wear and tear over a period of time, decreasing its value. The owner of a depreciated asset can then spend the depreciated amount on their tax return, thus offsetting some of the loss in value. Real estate falls into that category if it is used for business purposes, thus creating the concept of property tax depreciation.
It is important to note that land is not a depreciable asset, so the cost of the land is subtracted from the purchase price of the property to determine the cost of the building in question. The way the building is used determines the period of time over which the building depreciates. Depreciation is then calculated using the straight-line depreciation method, in which annual depreciation equals the original cost of the building divided by the time period of the depreciation.
For example, a building that houses a convenience store cost the owner $7,800 United States dollars (USD) to purchase. Since it is a non-residential building but is used for commercial purposes, the United States Internal Revenue Service (IRS) estimates the useful life of the building at 39 years. So the $7,800 is divided by 39, which means the property tax depreciation in this case is $200 each year. In other words, the value of the building in its second year would drop to $7,600, or $7,800 minus $200, then drop to $7,400 in its third year, and so on.
Rental property tax depreciation is calculated the same way, albeit with a 27-year useful life attached by the IRS. The amount of depreciation each year is known as depreciation expense and can be written off by the owner on tax returns. This also means that the assessed value of the building falls each time a depreciation expense is claimed, so that when the owner sells that property, he or she would realize higher capital gains. Since this is the case, you will have to pay higher taxes on receiving those gains than if the building had not depreciated.
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