Property Depreciation
This article explains how to track depreciation on your property
1. Overview of How Property Depreciation work for Real Estate Investors
Property Tools helps you track your property depreciation in the application so you can see both your operating income/cash flow and your taxable income.Rental property depreciation is the process of spreading out the cost of the building (not the land) over its useful life to reflect wear and tear and reduce taxable income. For U.S. tax purposes, the IRS assumes a residential rental property has a 27.5-year useful life (39 years for commercial), meaning you deduct an equal portion of the property’s cost basis each year. The cost basis includes the purchase price minus the value of the land.
To find the land value for depreciation purposes, you need to separate it from the total purchase price since land itself cannot be depreciated. There are a few accepted ways to do this:
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Property Tax Assessment Method (most common):
Use your local tax assessor’s ratio of land value to total assessed value. For example, if your property tax bill lists the land at $80,000 and improvements (the building) at $320,000, then land represents 20% of the total ($80K / $400K). You can apply that same 20% ratio to your purchase price — meaning if you bought it for $500,000, you’d assign $100,000 to land and $400,000 to the building for depreciation. -
Appraisal Method:
If you have a professional appraisal, it may break down land and building values separately. This is often more accurate, especially when land values vary significantly from assessed values. -
Comparable Sales or Cost Segregation:
For large or complex properties, investors sometimes use a cost segregation study to allocate costs among land, building, and components like fixtures or paving. This provides the most detailed breakdown for maximizing depreciation.
In practice, the IRS just requires that your allocation method be reasonable and supportable — meaning you can justify it with records (tax bill, appraisal, or study).
2. Tracking Depreciation in Property Tools
In order to track depreciation in Property Tools, you need to enter your estimated land value. To do this, navigate to Financials -> Depreciation in the sidebar navigation. You will see a list of your properties with the total value populated. You can enter the Land Value and hit the save button for that property and the system will generate your depreciation schedule and add it to the financial reporting.