Depreciation is the annual deduction the tax code allows for the wearing out of an income property's improvements. Residential rental buildings are recovered straight line over 27.5 years. Land is never depreciated, so the purchase price has to be split between land and building before the deduction can be calculated.
- Land is not depreciable, so the split drives the deduction. Thirty percent to land is a common rule of thumb; the range runs roughly 20% to 40%.
- The number needs support: the property appraiser's land value, a purchase-price allocation, or a cost segregation study. A CPA decides what is defensible.
- It reduces the property's tax basis as it is taken, which is what sets up recapture when the property is sold.
- Rules and rates change, and the effect depends on the owner's whole return. Confirm the treatment with a CPA before relying on it.
The same building at $1,599,500, with 30% of the price allocated to land, which is a common rule of thumb. The real split is supported, not assumed.
Forty thousand dollars of deduction that required no cash to be spent in the year it was taken.
Tax mechanics change and individual situations differ. Treat this as orientation, not tax advice; the numbers on a specific transaction belong with a CPA or qualified intermediary.
Related terms
All terms1031 Exchange
A 1031 exchange lets a US investment-property owner sell and roll the proceeds into another investment property while deferring the capital gains tax a plain sale would trigger.
OwnershipCapEx (Capital Expenditure)
Capital expenditure is money spent on the building itself rather than on running it: a roof, a new electrical panel, windows, a repiping, a parking lot.
FinanceCash Flow
Cash flow is what actually lands in the owner's pocket in a period: net operating income minus the mortgage payment and minus the capital dollars the building consumed.
Terms arrive with the writing.
The glossary grows as the Journal does, one email when something worth reading goes up. No noise.
Unsubscribe anytime. See our Privacy Policy.