Real Estate Property Depreciation Basis

Depreciation basis: 1. 27.5 yr. residential property/39 yr. commercial property. 2. Furniture, appliances or equipment five or seven years.

The time period for deducting depreciation depends on the type of investment. If the property is a commercial property, then the depreciation period is 39 years (as opposed to 27.5 years for residential property). Using a straight line depreciation method for a commercial property costing $2 million dollars, for example, you would receive an annual deduction of $51,282 ($2M / 39 = $51,282). Your annual net income is thereby reduced by that amount, for tax purposes, reducing the amount of taxes you owe to the IRS.

Unlike the building itself, items such as appliances or equipment typically fall on a shorter five- or seven-year depreciation schedule, because of their expected life. Furnaces on the other hand typically carry a depreciation schedule in line with the building itself, whether it is a residential or commercial property.

Not only can you depreciate the building, but you can depreciate any additional capital investments you made as well, which carry a minimum depreciation schedule of three years. These are commonly referred to as capital expenditures or CAPEX improvements. Here are some examples of what can be depreciated besides the building itself:
• appliances including refrigerators, washing machines, dishwashers, and stoves
• furnaces
• capital improvements such as a kitchen or bath remodel
• new windows
• full roof replacement
• leasehold improvements such as electrical system overhauls or new septic systems
• landscaping improvements
• legal fees, if carved out separately from the original purchase amount, and
• equipment used to maintain the property, such as landscaping equipment or cleaning appliances

For a breakdown of depreciable items and their corresponding schedules, see Chapter 2, Depreciation of Rental Property, in IRS Publication 527, Residential Rental Property. Chapter 2 is relevant for commercial properties, however, additional detail can be obtained on commercial investments from Chapter 4 in IRS Publication 946, How to Depreciate Property.

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