How Much Does A House Depreciate Per Year?

Key Takeaways

  • Depreciation isn’t your enemy; it’s just misunderstood.
  • Rental property depreciation is actually one of the greatest benefits awarded to qualifying passive income property owners.
  • The benefits of depreciation are so great that they should convince many to at least consider investing in rental properties.

Depreciation has become synonymous with the reduction of an asset’s value. As a result, most homeowners have come to resent the idea of depreciation. Who doesn’t hate the idea of their assets losing value?

It is worth noting, however, that depreciation isn’t your enemy; it’s just misunderstood. Rental property depreciation, for example, is actually one of the greatest benefits awarded to qualifying passive income property owners. You see, the Internal Revenue Service (I.R.S.) allows qualifying rental property owners to write off a portion of the asset’s initial cost each year in the form of “depreciation losses.” Qualifying owners are, therefore, allowed to recoup a portion of the initial cost of the home every year for as many as 27.5 years. Perhaps even more importantly, said deductions can reduce an investor’s tax obligations come tax time. The more they write off, the less they will have to pay in taxes, which begs the question: How much does a house depreciate per year? Better yet, how much can a qualifying homeowner write off each year, and for how many years?

The answer will surprise many of you, and perhaps even persuade you to look at acquiring your own passive income properties.

Depreciable Property: Do Homes Depreciate In Value?

Homes absolutely depreciate in value. As a physical asset, time takes its toll on any and every home on the market. Perhaps even more importantly, that’s how the I.R.S. sees it, too. In fact, the powers that be (the I.R.S.) have been kind enough to offset said depreciation with an allowance of sorts.

Otherwise known as depreciation losses, the I.R.S. willing to give rental property owners “allowances for exhaustion, wear and tear (including obsolescence) of property.” According to their own website, “You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization, (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.”

So again, do homes depreciate in value? In the eyes of the I.R.S. they most certainly do. However, as I am sure you are already aware, homes don’t always depreciate in value on the actual housing market. More often than not, homes have a tendency to appreciate — at least that’s what history suggests. Therein lies the greatest depreciation benefit of them all: phantom losses.

Again, the I.R.S. has already said it accepts that homes will depreciate over a 27.5 year period. As a result, qualifying rental property owners can write off a portion of the original cost each year, effectively reducing their tax obligations. However, home values typically rise over time. So while many rental property owners are allowed to claim depreciation, the actual value of their home tends to increase over time.

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Depreciation of rental property

Factors That Affect Property Value

There are seven factors that affect property value more than anything else. And while the following factors are in no way representative of everything that influences a home’s value, they are perhaps the most important — the tent poles, if you will:

  • Sales History
  • Neighborhood
  • Market Conditions
  • Size
  • Appeal
  • Age And Condition
  • Local Amenities

First and foremost, those looking to properly value a home will resort to its own sales history, and the sales history of nearby comparables. That way, the valuation will be based on historical data, and not something that is — at best — questionable. Next, a proper evaluation will take the home’s location into consideration. Everything from the zip code, city street and neighborhood all go into a proper evaluation. It is true what they say: real estate is all about location, location, location. Another prominent factor in valuing a property is the current state of the market. If for nothing else, supply and demand plays a huge role in determining value. Low inventory levels coupled with high demand will certainly drive up prices. What’s more, prices can just as easily drop in the face of inventory surpluses without demand. And finally, there’s the house itself. The size, style, age and condition are all factored into a proper evaluation.

There are countless factors that go into properly determining a home’s value — too many to count even. That said, the seven I hit on above are the most important, and are perhaps even the reason most homes tend to appreciate more often than not. At the very least, it’s these factors that combine to make deprecation losses even more rewarding for homeowners.

House Depreciation Rate

The house depreciation rate will depend largely on the system you intend to use, as there are two primary ways to calculate your own deprecation. If you depreciate your asset using the General Depreciation System, which lasts 27.5 years, “you would depreciate an equal amount: 3.636% each year as long as you continue to depreciate the property,” according to Investopedia. However, using the Alternative Depreciation System (ADS) will span upwards of 40 years, and result in a subsequent house depreciation rate.

That said, calculating your own home’s depreciation rate is no simple task. It is a complicated process at best, and should be left to a trained tax professional.

What Is Accelerated Depreciation?

As its name suggests, accelerated depreciation suggests an asset is losing value at a faster rate. Or, as InvestingAnswers so eloquently puts it, “Accelerated depreciation is a depreciation method whereby an asset loses book value at a faster rate than the traditional straight-line method. Generally, this method allows greater deductions in the earlier years of an asset and is used to minimize taxable income.”

It’s important to note that accelerated depreciation takes place in the earlier years of an asset. As for rental properties, the earlier years are the first 27.5, at least according to the Modified Accelerated Cost Recovery System (MACRS). Created in lieu of the Tax Reform Act of 1986, the MACRS grants rental property owners the ability to depreciate their assets over a period of 27.5 years — the “early” stages of a property. That said, the entire process of depreciation is a product of accelerated depreciation.

Does a house depreciate?

How To Increase The Market Value Of A Property

Learning how to increase the market value of a property, in addition to rental property depreciation, can really help a homeowner’s bottom line. That said, if you want to increase the perceived value of your own home, try implementing some of these projects that have some of today’s best return on investment (ROI):

  1. Mid-range Bathroom Remodel: The average mid-range bathroom remodel will cost homeowners approximately $19,143, but will recoup about 70.1% of the cost if the home is sold.
  2. Steel Entry Door Replacement: The average steel entry door replacement will set owners back about $1,471, but recoup about 91.3% at the time of a later sale.
  3. Mid-range Kitchen Remodel: A mid-range kitchen remodel costs about $63,829, but could recoup as much as 59.0%.
  4. Siding Replacement: On average, it costs about $15,072 to replace siding on a home, but the project could recoup 76.7% at the time of a sale.

How much does a house depreciate per year? I regret to inform you that there isn’t a simple answer. However, there are systems currently put inlace to make sure you are depreciating your own asset accordingly. To be certain, I recommend hiring a trained tax professional. You just might find it to be the one advantage you have been looking for.

Have you ever wondered how rental property depreciation works? Let us know your thoughts in the comments below.

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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies