Real Estate Depreciation Spreadsheet
Download REI Grove’s real estate depreciation spreadsheet to track property details, asset type, cost basis, placed-in-service date, annual depreciation amounts, and total depreciation cost.
Key Takeaways
- Real estate depreciation allows rental property owners to deduct a portion of a qualifying property’s value from taxable rental income over time.
- The spreadsheet uses the MACRS straight-line method and mid-month convention for residential and commercial real estate modeling.
- By using this spreadsheet, rental property owners can keep depreciation information more organized and prepare clearer records for tax season.
- REI Grove’s real estate depreciation spreadsheet is organized around property information, asset type, cost basis, placed-in-service date, annual depreciation schedule, and total depreciation cost.
Understanding Real Estate Depreciation
If you've ever filed real estate taxes, you've doubtlessly heard the term “depreciation.” Depreciation refers to the loss of value of an asset over time. Electronics, cars, real property, and other assets lose value, or depreciate, as they age.
Because your real estate gradually loses value, the Internal Revenue Service (IRS) allows (and requires) property owners to take yearly depreciation deductions on their qualifying property. This means that over a property's useful life, you must deduct a portion of its value from your taxable rental income on your tax return.
Depreciable assets like real property must be carefully documented so that you take the correct deduction amount each year of its use. Continue reading to learn more about how this process works, and download REI Grove's real estate depreciation spreadsheet (above) to help you track deductions for each year of your rental property's IRS recovery period.
What is Real Estate Depreciation?
As mentioned above, real estate depreciation refers to scheduled deductions taken on long-term real property to reflect their gradual decline in value.
Annual depreciation might seem counter-intuitive at first glance. The savvy investor will know that most real estate tends to appreciate over time, even if the property suffers typical wear-and-tear. However, rental property depreciation applies even if your property increases in value over time.
Qualifications
As you know, residential real estate is subject to depreciation. But what else qualifies? Below are the IRS's four criteria for depreciation:
- Long-term property. The property must last longer than one year and be part of your capital investment. Buildings, cars, appliances, and equipment are all depreciable.
- Subject to wear and tear. The property must have a finite usable lifespan.
- One year minimum ownership. For real estate, the property must be in your name for at least one year.
- Rental business use. The property must be used for your rental business, not personal.
How Does Depreciation Work?
Depreciation deductions allow you to deduct a portion of your property's value from your taxable income over each year of its useful lifespan. A property's useful lifespan is also called its recovery period, and it is determined by the IRS. In order to depreciate residential rental property, for instance, you'd need to know that that asset class's recovery period is 27.5 years.
Below are the IRS recovery periods for a few common types of property:
| Type of Property | Recovery Period |
|---|---|
| Residential real property | 27.5 years |
| Commercial real property | 39 years |
| Non-building permanent structures (e.g., fences, sidewalks) | 15 years |
| Manufactured homes | 10 years |
| Computers, equipment, and furniture | 5 years |
| Automobiles | 3 years |
Recovery periods begin when the property is placed in service (installed or ready to rent) and end when you fully recover its value, retire it, or sell it. The whole process starts over with each new owner whenever the property is bought or sold.
Like any deduction, depreciation deductions reduce your tax bill in the time that you own the property. This is great news for investors—it means you'll pay less in taxes and save more money to reinvest in your business.
However, it's important to note that depreciation is only a delay in taxes—not an elimination of them. Because property values typically do increase over time, the IRS looks to “recapture” the taxes you avoided paying when you sell the property later. This is called depreciation recapture, and it refers to when the IRS taxes the amount of your sales profit attributable to depreciation deductions. Although there are ways to delay this process further (like 1031 “like-kind” exchanges), it's important to remember this before selling your property.
How to Calculate Real Estate Depreciation?
Now that you understand the basics of depreciation, you may be wondering how to calculate real estate depreciation for your investment property. There are a few different methods. Each of them requires that you know two things:
- The cost basis of your property, or its value for tax purposes. For real estate, the cost basis is generally determined by taking the property's purchase price, adding certain other expenses, and subtracting the cost of land (which is not a depreciating asset).
- The recovery period for that specific type of property (commercial or residential rental property).
Once you know these two numbers, you can move on to deciding which depreciation method applies. You'll need to know which method is the correct one to use even if you're just interested in getting a rough estimate using a real estate depreciation calculator or spreadsheet.
Modified Accelerated Cost Recovery System
The overall system used in the U.S. for tax depreciation is the Modified Accelerated Cost Recovery System (MACRS). It includes various methods to recover the cost of assets over time, primarily for tax purposes.
MACRS is most associated with accelerated depreciation, which front-loads depreciation expenses to the earlier years of the asset's life (e.g., declining balance methods). However, for certain types of assets (like residential and nonresidential real property), MACRS prescribes a different method to calculate depreciation called straight-line depreciation. This is because a more even expense distribution over the asset's useful life is often more appropriate for these types of property.
We'll look at each of these methods in more detail in the next sections. The idea is that under MACRS, taxpayers might use either method depending on the property type and circumstances. Keep in mind that there are specific rules as for when you can elect to use each method, so we recommend reading the IRS rules yourself or reviewing them with a real estate tax professional if you have questions.
Straight-Line Depreciation
Straight-line depreciation is the simplest method of depreciation. Using the straight-line method, equal amounts of the cost basis are deducted each year except for the first and last, which vary based on the month the property was placed in service. For example, if you're depreciating a residential property using the straight-line method, the deductions would amount to about 1/27.5 of the cost basis each year.
Accelerated Depreciation
In some cases, MACRS allows for faster depreciation of a property in the first few years it is in service, with slower depreciation in later years. MACRS depreciation includes the general depreciation system (GDS) and the alternative depreciation system (ADS), each with different recovery periods and methods.
Accelerated depreciation real estate benefits include the ability to take larger depreciation deductions up front, which saves you money and gives you more capital earlier on to reinvest in your business. The GDS is best for assets with short recovery periods, like computers and equipment. It's best to talk with a tax advisor knowledgable about depreciation deduction to determine whether the alternative depreciation system or general depreciation system applies.
Tax Implications
It's usually beneficial for investors to take as many tax deductions as they qualify for. This will allow you to free up as much cash as possible to reinvest in your business and grow it earlier rather than later, maximizing returns.
Tax strategies like cost segregation can help you save even more money, by taking advantage of shorter recovery periods when possible (e.g., separating a swimming pool from the rental property you bought it with).
In some cases, it may be possible to deduct the cost of certain depreciable personal property all at once, in the first year of ownership (like you would deduct the cost of a repair or operating expense) rather than depreciating it over time. If you can do this, you should – you will free up even more money and eliminate concerns about recapture down the line.
For example, bonus depreciation is used for personal property and usually automatically applied. Likewise, the De Minimis Safe Harbor allows you to fully deduct any property less than the $2,500 cap. Section 179 expensing also allows single-year deductions under specific rules to follow.
Most of these exceptions apply to lower-cost personal or business property related to your rental business, but you should look for all ways to save money on your taxes.
What Does the Real Estate Depreciation Spreadsheet Cover?
REI Grove’s real estate depreciation spreadsheet is designed as a modeling tool that helps rental property owners calculate the depreciation amount to be deducted each year of a rental property's IRS recovery period.
This spreadsheet includes:
- Property name + address
- Asset type
- Purchase price
- Depreciable closing costs
- Date the property was placed into service
Section 1: Property Information
The spreadsheet begins with basic property information. This keeps the depreciation schedule connected to the correct rental property and creates a cleaner record for future reference.
This section includes:
- Property name
- Property address
Section 2: Asset Type
The asset type field lets property owners identify the kind of real estate being depreciated. In the spreadsheet, the asset type options include residential real estate and commercial real estate.
This section includes:
- Residential real estate
- Commercial real estate
Section 3: Cost Basis
The cost basis section helps determine the amount used in the depreciation calculation. For real estate, the cost basis is generally determined by taking the property's purchase price, adding certain other expenses, and subtracting the cost of land, which is not a depreciating asset.
This section includes:
- Purchase price
- Land value
- Depreciable closing costs
- Depreciation cost basis
Section 4: Date Property Was Placed Into Service
The placed-in-service date is the date when the property is installed, ready to rent, or otherwise available for rental business use. This date matters because depreciation begins when the property is placed in service.
This section includes:
- Date property was placed into service
- Month-based depreciation treatment
- First-year depreciation calculation
Section 5: Depreciation Schedule
The depreciation schedule shows the annual depreciation amount for each year in the property's recovery period. The spreadsheet also totals the depreciation cost at the end of the schedule.
This section includes:
- Year
- Depreciation amount
- Total depreciation cost
Section 6: Reference Data and Tax Review
The spreadsheet includes reference data for IRS monthly depreciation rates and asset type categories. It also notes that the spreadsheet uses the MACRS straight-line method and mid-month convention.
Depreciation can become more complex when incorporating accelerated methods, safe harbors, or specific IRS regulations. Consult a tax professional if you have questions about the application of these methods.
Real Estate Depreciation Spreadsheet at a Glance
| Spreadsheet Section | What It Tracks | Why It Matters |
|---|---|---|
| Section 1: Property Information | Property name and property address. | Keeps each depreciation schedule tied to the correct rental property. |
| Section 2: Asset Type | Residential real estate or commercial real estate. | Determines which recovery period applies. |
| Section 3: Cost Basis | Purchase price, land value, depreciable closing costs, and depreciation cost basis. | Establishes the amount used for depreciation calculations. |
| Section 4: Placed-in-Service Date | The date the property was installed or ready to rent. | Starts the depreciation schedule and affects first-year depreciation. |
| Section 5: Depreciation Schedule | Year-by-year depreciation amount and total depreciation cost. | Organizes annual deductions across the property’s recovery period. |
| Section 6: Reference Data and Tax Review | IRS monthly depreciation rates, asset type categories, and tax professional reminder. | Supports the spreadsheet’s calculations and reinforces the need for tax review. |
Conclusion
Understanding real estate depreciation can be a daunting endeavor. It's highly complex, and the rules often change over time. REI Grove's real estate depreciation spreadsheet is a great way to get started understanding the depreciation basics and fundamentals you'll need to know to file your return correctly come tax season. However, you should also seek advice from a tax advisor who can answer common rental property depreciation FAQs and offer further guidance on how to claim depreciation deductions.
FAQs
What is real estate depreciation?
Real estate depreciation is a scheduled tax deduction taken on long-term real property to reflect its gradual decline in value over time.
Does rental property depreciation apply if the property increases in value?
Yes. Rental property depreciation can still apply even if the property appreciates in market value over time.
What does the REI Grove real estate depreciation spreadsheet include?
The spreadsheet includes property name, property address, asset type, purchase price, land value, depreciable closing costs, and placed-in-service date.
What is cost basis?
Cost basis is the property's value for tax purposes. For real estate, it is generally calculated by taking the purchase price, adding certain expenses, and subtracting the value of land.
Why is land value subtracted from cost basis?
Land value is subtracted because land is not a depreciating asset. The spreadsheet focuses on the depreciable portion of the real estate investment.
What is a recovery period?
A recovery period is the useful lifespan assigned to an asset for depreciation purposes. Residential real property is commonly depreciated over 27.5 years, while commercial real property is commonly depreciated over 39 years.
What does placed in service mean?
Placed in service means the property is installed, ready to rent, or available for rental business use. Depreciation begins when the property is placed in service.
What is depreciation recapture?
Depreciation recapture refers to the IRS taxing the portion of sales profit that is attributable to depreciation deductions previously taken when the property is sold.