Commercial real estate depreciation is a tax term that refers to the gradual decrease in the value of a commercial property over time. Depreciation is a valuable tax deduction for commercial property owners, as it can reduce taxable income and lower tax bills. In this article, we will explore what commercial real estate depreciation is, how it works, and how it can benefit property owners.
Depreciation is a non-cash expense that reflects the wear and tear that a property undergoes over time. Buildings and other structures lose value as they age, and this loss in value is reflected in the property’s depreciation. Depreciation is also affected by factors such as changes in technology, shifts in market demand, and changes in local building codes and regulations.
Commercial real estate depreciation is calculated based on the cost of the property, minus the value of the land it sits on. The cost of the property includes not only the purchase price but also the cost of any improvements or renovations made to the property. The value of the land is not depreciable, as it does not lose value over time.
Depreciation is calculated using a formula that takes into account the cost of the property, the useful life of the property, and the property’s salvage value at the end of its useful life. The useful life of a commercial property is typically 39 years, which is the length of time over which the IRS allows commercial real estate to be depreciated.
The amount of depreciation that can be taken in a given year is determined by the Modified Accelerated Cost Recovery System (MACRS), which is a set of rules established by the IRS for determining depreciation deductions. Under MACRS, commercial real estate owners can take a depreciation deduction equal to 1/39th of the property’s cost basis each year.
Depreciation can provide significant tax benefits for commercial real estate owners. By reducing taxable income, depreciation can lower tax bills and increase cash flow. Additionally, depreciation can be used to offset gains from the sale of the property, allowing property owners to defer taxes on capital gains.
Commercial real estate depreciation is a tax deduction that reflects the gradual decrease in the value of a commercial property over time. It is calculated based on the cost of the property, the useful life of the property, and the property’s salvage value at the end of its useful life. Depreciation can provide significant tax benefits for commercial real estate owners, reducing taxable income and increasing cash flow. It is an important tool for property owners looking to maximize their returns on investment in commercial real estate.