If you need explanatinons, scroll down for each item's meaning and how we calculate your depretion.
The explanatinons below are just basics. If you like to study a bit deeper, read our article : how to calculate real estate depreciation.
There are a few ways to calculate depreciation but we follow MACRS depreciation method as this is the method used for tax return. If you like to confirm our basis with IRS, please MACRS rules : Publication 946.
Super simple basic equation for your yearly depreciation is :
(Adjusted basis : Acquired amount - Land amount + Capitalizable cost) / Number of years
We will explain about each item in more details in the following.
This is simply how much you paid for. If the asking price was $500,000 and you agreed with the amount, $500,000 is the acquired amount.
There are some expenses you paid for can be included into your depreciable asset amount. You can check more details at how to calculate basis of asset. You may add some legal cost and title cost. If you paid $3,000 for your lawyer and survey for $1,000, you can include $4,000.
Here is the sad reality. You cannot depreciate the land of your property. In order to receive tax benefit on the depreciation, your asset has to depreciate over the years. Your land will not depreciate. Even your house is burned down, your land has value always. That is why you have to reduce your basis as much as your land. Sometimes your deed states. Surprisingly, a lot of times, it does not. In that case, discuss this matter with your CPA, they will tell you which % you should put as land. It could be 20% or even 50% depending on the type of your property.
Now with the items above, you can calculate your depreciable adjust basis.
Adjusted basis($404,000) = Acquired amount($500,000) - Land amount (20% : $100,000) + Capitalizable cost($4,000)
In order to get your correct yearly depreciation rate, you need to choose the correct depreciation chart among 5 depreciation charts (A-6, A-7, A-7a, A-13, A-13a) for you to choose. You need two types of information to choose your correct depreciation chart :
Now you think, I am not sure if my property qualifies for GDS or ADS... Yes, you should consult with your CPA. The date you placed your property in business also matters but that, we already put it our calculation. So no worries about that. Most of cases, you choose GDS and use A-6 for residential property to depreciate over 27.5 years or A-7a for commercial property over 39 years.
If you like know more details about GDS and ADS, check our article: how to calculate real estate depreciation
Let's say you got your table now. Here is A-6 chart as an example :
Basically you multiply your adjusted basis amount by each depreciation calculation rate vertically on the correct column. If your start date is 7/1/2020, you choose "7" column.
You start from 1.667% for your first year and 3.636% for the second year and so forth.
1st year (2020) depreciation amount($6,734.68) = Adjusted basis($404,000) x 1.667%
2nd year (2021) depreciation amount($14,689.44) = Adjusted basis($404,000) x 3.636%
If you add each year's depreciation, the total should be $404,000. If not, you have calculated something wrong. You depreciate your property little by little over the next 27.5 years. That means your adjust basis (100%) would be depreciated over the years.
We built this calculator to help you calcualte your depreciation amount. If your situation is complicated, of course you need to discuss it with your CPA but if its a simple deal, this calculator should be enough for you to calculate. Hiring your CPA may be very expensive so maybe it may be cheaper to use our calculator and confirm it with your CPA. If you there is something you want us to add, please feel free to Contact us.