Depreciable Life

Definition§

Depreciable Life refers to the period over which the cost of an asset can be allocated for tax recovery or appraisal purposes. This period can differ based on the intended use, whether it is for tax benefits or understanding the economic durability of the asset.

For instance:

1. Tax Purposes: In this scenario, depreciable life is determined by IRS guidelines under systems like the Modified Accelerated Cost Recovery System (MACRS).

   • Example: Abel buys an apartment complex, and for tax purposes, the building has a 27.5-year depreciable life.

2. Appraisal Purposes: Here, depreciable life represents the estimated economic useful life of an asset as assessed by an appraiser.

   • Example: Baker buys an apartment complex, and an appraiser estimates that the roof will last 15 years, so it has a 15-year depreciable life for economic purposes.

Frequently Asked Questions§

Q1: What is the Modified Accelerated Cost Recovery System (MACRS)?

• A1: MACRS is the current tax depreciation system in the United States, which allows the cost of tangible property to be recovered over a specified life span through annual deductions.

Q2: How is depreciable life different for commercial and residential properties?

• A2: Commercial properties have a depreciable life of 39 years under IRS rules, while residential rental properties have a depreciable life of 27.5 years.

Q3: Can the value of land be depreciated?

• A3: No, only the value of the buildings and certain assets can be depreciated; land itself cannot be depreciated.

Q4: How do improvements affect depreciable life?

• A4: Significant improvements can reset the depreciable life of certain elements of a property. These improvements would have their own separate depreciation schedule.

Q5: What happens when the depreciable life of an asset surpasses its economic useful life?

• A5: If an asset’s economic useful life is shorter than its depreciable life, it may require a reassessment, but typically depreciation would continue until the end of the IRS-specified period unless the asset is disposed of earlier.

Related Terms§

• Depreciation: The process of allocating the cost of a tangible asset over its useful life.

• MACRS (Modified Accelerated Cost Recovery System): The current tax depreciation method in the U.S. which accelerates cost recovery.

• Useful Life: The estimated lifespan of a depreciable fixed asset, during which the asset is expected to be usable for its intended purpose.

Online Resources§

1. IRS Publication 946: How to Depreciate Property
2. Depreciation Guide from Investopedia
3. Real Estate Depreciation Resources

References§

1. Internal Revenue Service. “IRS Publication 946 (2020), How to Depreciate Property.” Accessed 2023, https://www.irs.gov/publications/p946
2. U.S. Department of the Treasury. “Modified Accelerated Cost Recovery System (MACRS).” Accessed 2023, https://home.treasury.gov/

Suggested Books for Further Studies§

1. Real Estate Finance and Investments by William Brueggeman and Jeffrey Fisher
2. The Real Estate Investor’s Guide to Cost Segregation by Denis N. Gariboldi
3. Owning Income Properties by Owen Reagan

Real Estate Basics: Depreciable Life Fundamentals Quiz§