Residential Rental Property Depreciation Calculator

Cody Cromwell
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How to Read Your Rental Property Depreciation Calculator Results

In a nutshell, depreciation is the loss of value due to wear and tear, deterioration, devaluation, obsolescence and normal use. There are two types of depreciation. There is pre-depreciation which means that the depreciation will take place prior to purchase. Post-depreciation which occurs when you start using your property.

The IRS allows the IRS allows ten years for amortization of the principal (adjusting for inflation and taxes). Take into consideration the overall running time of the property which would be the depreciation account balance, taking into consideration of amortization.

The depreciation depreciations can be seen in the tax statement. When you pay your tax, you deduct the amounts from one year to the next. If you are retired, you will need to use your final tax statement … for the last year.

In a nutshell, depreciation is the loss of value due to wear and tear, deterioration, devaluation, obsolescence and normal use. There are two types of depreciation. There is pre-depreciation which means that the depreciation will take place prior to purchase. Post-depreciation which occurs when you start using your property.

The IRS allows the IRS allows ten years for amortization of the principal (adjusting for inflation and taxes). Take into consideration the overall running time of the property which would be the depreciation account balance, taking into consideration of amortization.

How the Rental Property Depreciation Calculator Works

In a nutshell, to determine the depreciation expense on a rental property, you need to calculate the rental revenue, operating expenses and taxes for one year.

You can then use the rental property depreciation formula to figure out how much your rental property will depreciate over its estimated useful life.

The break-even point for owning the property as opposed to renting it out, as well as the best time to sell the property, are also calculated via the residential rental property depreciation calculator.

This rental property depreciation calculator is ideal for residential rental property investors, property managers – even residential tenants – who are wondering how much their rental property may be worth to them.

For tenants who need to start or stop their leases on a month-to-month basis, this rental property depreciation calculator is also ideal.

An example of this would be those who are renting a business property in a business park where the landlord does not provide a lot of service or maintenance to the property. When their lease is up, they move to another property after all expenses are accounted for. Or in the case of the tenant entering a contract with a new business that does not last for an entire year, the new tenant will begin their lease terms with the landlord at that time.

Who a Rental Property Depreciation Calculator Is Right For

If you are thinking about renting out your property before you retire, then you’re most likely planning on making sufficient profit from any rent by building equity through rent dollar-for-dollar. But if you need to build up additional equity, then buying a rental property is ideal in order to realize that goal. Whether you are replacing an existing property that you no longer want or whether you want to diversify your rental portfolio, a rental property could be what you’ve been looking for.

If that is the case, then learning about a rental property depreciation calculator is something that should be on your to-do list. A rental property depreciation calculator can help you determine your net rental yield, which is the amount of net income after all expenses, taxes and insurance. Having an idea of your net rental yield will help you make the most informed decisions about investing in a rental property.

Rental Property Depreciation Calculator Inputs

The overall value of a home is based on its market value. Based on local and national market trends, most appraisers come up with a fair market value based on the following inputs:

Zoning: The municipality where the property is located

Property location: Location of the property on the map

Gross rental income: Generally, appraisers consider the gross rental income as a baseline. But if you are purchasing an apartment complex or a commercial property, you can offer a higher gross rental income to make sure the property is worth a higher price.

Property taxes: Appraisers are looking at taxes charged on the property to determine its price tag. Property taxes and tax exemptions are directly related to the government’s overall revenue.

The appraiser will look at the sales history of similar buildings to determine what price a comparable building should bring. And then your property will be valued according to its market value.

Rental Property Depreciation Calculator Outputs

Most renters, at some point in their life, have rented out their apartment or house. They are usually forced to make a few compromises to afford the rent, one of them being to cover for the repairs the landlord is too cheap to make. Though renters are frequently charged for replacements and other repairs, they usually don’t receive an official document confirming their claims.

A Residential Rental Property Depreciation Calculator, designed by Real Estate Mapper, provides you with a few options as to how you want to calculate the expenses. You can choose to do so in either three, five or seven years, or simply drop the year and choose a more recent year as your starting point. The calculator will work its magic and spit out the depreciation amount for the next seven years and any possible interest that falls more than the usual 30-day grace period.

The best part of this calculator is the way it helps you understand the costs involved in renting a home. It will show you the total expenses, covering such basic things as basic maintenance and repairs, plus the total expenses incurred as a result of depreciation, including depreciation itself as well as the interest.

The Residential Rental Property Depreciation Calculator from Zillow gives you a better idea about the true value of renting your house as opposed to staying within the walls of yours or even investing in real estate.

Pros and Cons of Using Rental Property Depreciation

For most people undertaking the purchase of a residential property there are many different factors that can affect the cost of the property.

One of the factors that plays an important part in the overall decision of whether to purchase the property is its depreciation.

Depreciation is the re-evaluation of property's value after it undergoes some type of loss, or decrease in value. Admittedly, it is a hard topic to get your head around.

The depreciation of property can be measured in at least two different ways … by percentage or a fixed amount.

By percentage, when accounting for depreciation, the lower the percentage the property decreases in value, the better.

If a property decreases in value by 5% over the term of a mortgage or agreement, it means that in the end, the homeowner will pay less, not more than they originally thought.

This is a valuable tool for the property owner to have, not only for passing on to the next homeowner who takes over, but also for a back-up plan if the current intended owner decides to stop renting the property at a later date.

Unfortunately, it is difficult to establish an exact percentage decrease in value, especially when accounting for non-monetary and intangible losses.

This is why any decent property depreciation calculator will list a range where they believe the property will depreciate based on the current mortgage price and other fixed costs.

Rental Property Depreciation Pros

Depreciation allows the owner of real estate to deduct the decline in value of the property as long as they own and use it for business. Real estate depreciation is calculated annually and is a percentage of the value of the home when it was purchased.

The IRS has a four stage system to one of the most common types of depreciation – the 39-year-old tax law.

The 39 years old Act is the one that handles the question of depreciation for residential rental properties. What does 39 years mean?

It’s borrowed the life expectancy of a typical person (or in this case, a typical homeowner). In the meantime, if you’re looking to buy property, the long-term capital gains tax, which is slated to expire at the end of 2012, will apply to the appreciation of a property.

As a result, rental properties as investments are often better suited to someone who is perhaps looking to invest in a property for a significantly longer period of time.

Rental Property Depreciation Cons

Idered a business expense in which the money you spend on maintenance and improvement is deducted from the sales price of a property and used to deduct other expenses from your taxable income. If the rental income and expenses equal zero, the pretax rental income is unrealized and does not affect your taxable income.

If the rental property you purchase appreciates, it increases the value of your property. The increase in value is a tax-free return on your investment. If you add a rental property to your household assets, the actual return is usually much higher than the rental income/expense computed under the straight-line depreciation method. However, figuring out the basis of your rental property return is not as easy as it seems. To compute your basis in the property as well as the rental income/expense, you have to perform an analysis that includes straight-line depreciation, deduction for state taxes, and revenue for nonresidential property. Note: In the case of rental property, "straight-line" is not the same as "simple." If you are compounding tax rates, then "straight-line" is not an option.

Tax Advantage Alternatives to Using Rental Property Depreciation

Most individuals recognize the limitations of the home loan interest deduction and would like to take advantage of other tax breaks. One of the most popular ways is by deducting maintenance expenses for a principal residence.

However, the use of the home loan interest deduction is discouraged by many accounting and tax authorities, who emphasize that investment expenses should be capitalized on the business books.

This review, which focuses on tax minimization, suggests that using an IRS depreciation calculator offers tax planning benefits.

A home is a major investment for most individuals, and, as a result, it is often appraised and taken into account in the process of estate planning. Thus, it is important to ensure that the home is properly taxed.

The Federal Tax Court has correctly ruled that a complete home taken into tax, including the land on which it is built, should be taxed as a separate asset. Accordingly, the investment company should capitalize the total cost of purchasing and building the home and deduct only the annual depreciation.

In his lead case, Sec. v. Kerkorian (1978), 649 F.2d 338, the court followed the IRS’s proposed regulations, which indicate that:

Any structure on land can be depreciated over its useful life. Personal property on land cannot be depreciated, except for land improvements.

The Bottom Line

When you’re looking to purchase your first home, an issue that you’ll likely want to consider is the appreciation rate of your rental property. The greater your annual appreciation rate, the more money you’ll make and the more equity you’ll gain as a homeowner.

The good news is that it’s easy to calculate your appreciation rate, and there are many resources online to help you do so. Using this calculator will help you determine your anticipated annual home appreciation rate (your mortgage payment or rent plus the equivalent in home value). In the end, you just need to log into your savings or account to illustrate the result of your calculation.