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:

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.
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.

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

References

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

Suggested Books for Further Studies

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

Real Estate Basics: Depreciable Life Fundamentals Quiz

### Does depreciation apply to both the building and the land it is on? - [ ] Yes, both the building and the land can be depreciated. - [x] No, only the building can be depreciated. - [ ] Depreciation does not apply to real estate at all. - [ ] Both the building and land depreciate equally. > **Explanation:** Depreciation only applies to the building itself and not the land it is located on. Land typically does not lose value over time, whereas buildings do due to wear and tear. ### Over how many years must residential property be depreciated according to tax laws? - [x] 27.5 years - [ ] 15 years - [ ] 30 years - [ ] 39 years > **Explanation:** According to tax laws, residential properties must be depreciated over a 27.5-year term. This allows for an annual deduction related to the depreciation. ### Over how many years must commercial property be depreciated according to tax laws? - [ ] 27.5 years - [ ] 30 years - [x] 39 years - [ ] 45 years > **Explanation:** According to tax laws, commercial properties must be depreciated over a 39-year term. This extended period helps distribute the depreciation deduction over a longer time frame. ### Which type of property allows for depreciation as an income tax deduction? - [ ] Personal-use property - [ ] Land - [x] Income-producing property - [ ] All types of property > **Explanation:** Depreciation can be used as an income tax deduction for businesses for properties that are used for income-producing activities. Properties used for personal purposes do not qualify for depreciation deductions. ### What must a property have for it to qualify for depreciation? - [x] A useful life of at least one year - [ ] A mortgage attached to it - [ ] An appraisal conducted every three years - [ ] Equal use between personal and business > **Explanation:** To qualify for depreciation, the property must have a continued useful life of at least one year and must be used for an income-producing activity. ### Who provides the allowance for the normal wear and tear of a piece of property? - [ ] Real estate agents - [ ] Local municipalities - [ ] Property management companies - [x] The Internal Revenue Service (IRS) > **Explanation:** The Internal Revenue Service (IRS) provides an allowance for the normal wear and tear of a piece of property, which can be deducted from taxable income through depreciation. ### When filing an annual tax report, who can claim depreciation? - [ ] Any resident of the United States - [ ] Any homeowner regardless of purpose - [x] Individuals or businesses that own income-producing property - [ ] Only those with newly built properties > **Explanation:** Only individuals or businesses that own income-producing property and meet other specified criteria can claim depreciation when filing an annual tax report with the IRS. ### Depreciation is used to offset which type of expense for businesses? - [x] Income tax liability - [ ] Mortgage interest - [ ] Utility expenses - [ ] Insurance premiums > **Explanation:** Depreciation can be used as an income tax deduction, effectively reducing the income tax liability of a business. ### Why is depreciation especially important for businesses? - [ ] It is a source of immediate revenue. - [ ] It increases the value of properties. - [x] It allows for a significant tax deduction over time. - [ ] It avoids the need for any property-related expenses. > **Explanation:** Depreciation is important for businesses as it allows for a significant tax deduction over time. This tax benefit can improve the financial condition of the business by reducing tax liabilities. ### What aspect of a property predominantly affects its depreciation schedule? - [x] Whether it is residential or commercial - [ ] The construction material used - [ ] The color of the building - [ ] The landscape quality > **Explanation:** The depreciation schedule is predominantly affected by whether the property is residential or commercial, with residential properties having a 27.5-year term and commercial properties having a 39-year term.