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Depreciation is the loss of value in an improvement over time. Since land is assumed to retain its value indefinitely, depreciation only applies to the improved portion of real property.

Depreciation from an Appraiser’s Perspective

Depreciation and the loss of a property’s value can come from any cause, such as deterioration, obsolescence, or changes in the neighborhood. An appraiser considers depreciation as having three causes: physical deterioration, functional obsolescence,
and economic obsolescence.  The sum of depreciation from all causes is accrued depreciation.

Depreciation from an Accounting Perspective

From an accounting, tax and property valuation consideration, Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount of an asset’s cost that has been allocated and reported as an expense for the period (year, month, etc.) shown in the income statement’s heading.  The Annual Depreciation Rate determines how much a property owner is allowed to deduct every year. Depreciation is further defined as;

    • The allocation of the cost of an asset, taken as an expense against any income that asset produces.
    • The return of investment in business and income-producing property, prorated over its class life.
    • An annual deduction that reduces basis when calculating gain or loss at the time of disposition.
    • The non-cash, tax-deductible expense that reduces taxable income but does not reduce cash flows.

Accelerated Depreciation and Cost Segregation

Additional tax benefits can be obtained by the investor through the use of Accelerated Depreciation and Cost Segregation.

Accelerated Depreciation provides a way of deferring corporate income taxes by reducing taxable income in current years, in exchange for increased taxable income in future years. This is a valuable tax incentive that encourages businesses to purchase new assets.

Cost Segregation Cost segregation is a useful tax strategy that allows real estate investors who have acquired, built, or purchased land or real property to reduce their taxable income by having a cost segregation study or segregation analysis completed on the property. Thereby accelerating the depreciable amounts in current years.

Below is a Depreciation Calculator which will provide a basic analysis to determine a properties standard depreciation.

Depreciation Calculator

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