There are a lot of financial aspects of owning a rental property that can get overlooked.
Depreciation can be a struggle for any real estate owner. Depreciation is a reduction in the value of any asset that is caused by the passage of time due to wear on the asset. The Internal Revenue Service allows the depreciation expense to be written off each year to recover the cost of the initial investment. While not an efficient means to recover cost but it can help with overall loss. Today we are going to discuss how to calculate an improvement ratio to increase your annual depreciation.
What Are Methods to Calculate Depreciation?
There are several different methods for calculating depreciation and thankfully, the Internal Revenue Service doesn’t have a specified preference. Ultimately it is your choice to decide how to allocate the purchase price between the land and improvements you need to make. If you can stand by your calculations, you will hold up during an audit without trouble. If you do not understand your own calculations then you may end up having to pay back a portion of what has been written off over the years.
There are two main methods to determine improvement versus land value and in turn, gain depreciation income. The best result comes with using all of these things and selecting which one gives you the best results.
Property Tax Card
This requires the least amount of effort in substantiating your own personal calculations. Your property tax card should list the value of your land and an improvement value, giving you a total. Divide your improvement value by your property tax card to get your investment ratio. Apply your ratio to your purchase price and it will give you a depreciable basis.
Buyer And Seller Appraisals
This takes a little more effort and money because the cost of an appraisal needs to be accounted for, but will substantiate your calculations. Follow the same formula as above, but you are using the numbers used in your appraisal rather than the land value at your estimate.
Trust Clagett Enterprises For Your Real Estate Needs
If you are looking for the perfect realtor for your property or to assist during your purchase of any home, you can rely on Clagett Enterprises. Clagett Enterprises is a full-service real estate company with almost 30 years of experience in the Frederick and Western Maryland area. For assistance in selling your home and getting the best possible price, contact us online or give us a call at 301-665-6609. To meet our team and see some of our beautiful homes follow us on Facebook, Twitter, Pinterest, and Google+.