Answer for "What happens when a property starts to depreciate?"
You came in here looking to find out what happens when a property starts to depreciate but the truth is that the question comes from a false premise because not all properties depreciate. To start off, we need to refer back to what is property depreciation in the first place. If we’re talking about the general concept of things losing their value over the span of time, then the answer to what happens when a property starts to depreciate is… it loses its value.
However, analyzing the tax and accounting aspect of it, things change.
These are the types of property that do depreciate:
- Investment properties (rentals)
- Commercial real estate
- Mobile homes
You might have noticed that aside from Mobile Homes, the rest of the properties that depreciate are real estate that’s used for non-residency purposes. So we arrive at the main idea regarding depreciation: is home depreciation common? Generally, real estate that serves as a residence does not depreciate. What actually depreciates (or increases its value) is the area in which the residence is at - which is what explains when, within a few years, homes can regain (or make it worse) that depreciation. The dwelling itself, however, has little weight to the equation, as building methods and materials don’t develop that much from year to year. The fact that mobile homes depreciate is due only to its “mobile” part, as automobiles do depreciate because of the fast pace with which the automobile industry develops new pieces and technologies.
So, why investment properties and commercial real estate (including office space) depreciate? Because its offices go into the calculation of profits of any business. Depreciation becomes, then, a way to write-off expenses of your business. In fact, if part of your house is used for home offices, the IRS allows you to deduct that portion. So, what happens when those properties start to depreciate? The deductible amount depreciates too. This depreciation is done due to dilapidation but also due to the depreciation (or the value increase) of the location.
Real Estate Advice:
If you’re in the market buying a home and you intend on working in a home office, make sure to tell that to your local real estate agent! He might have some important advice about square footage for your home office and save you some sweet tax money!
Have a question or comment?
We're here to help.