I am going to provide another example on how to calculate depreciation. Lets say two close buddies Tim and Mike bought a four-plex next to the beach and paid $600,000.00 for it. The land was valued by the county at 40% of the total investment , which leaves 60% for the value of the improvements. The question is how much depreciation could they claim each year if the allwoance for depreciation on the property over 27.5 years?
Step #1:
Calculate the value of the improvements:
$600,000.00 x 60% (.60) = $360,000.00
Step #2:
Divide the value of improvements by the years:
$360,000.00 divided by 27.5 years = $13,091.00 as a allowable annual depreciation.
What does all of this mean?
When Tim and Mike sell this property , the amount depreciated over the years will be subtracted from their cost basis to determine their captial gain. In addition, when this property is sold the new owner who buys the house is allowed to begin depreciating this property as if this property was brand new, and his solely based on the new sales price. Deprecation is a great tax advantage of ownership of income property newbie investors just dont understand how it works.
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