Question

Kimberly has a retail clothing store that makes a net operating income (NOI) of $300,000. She originally purchased the property for $2,500,000 and places $500 a month into escrow for replacement reserves. She estimates the land value to be $400,000.

She received a mortgage for $1,625,000. The payments each month include principal and interest during year 2 of $45,909 and $88,229 and during year 1 of $56,843 and $99,651 respectively. What is the depreciation for year 1 and 2?

Answer 1

As per IRS, the formula for depreciating commercial real estate looks like this:

• Cost of property – Land value = Basis
• Basis / 39 years = Annual allowable depreciation expense
• $2500,000 cost of property – $400,000 land value = $2100,000 basis
• $2100,000 basis / 39 years = $53,847 annual allowable depreciation expense

Therefore, both year 1 and year 2 depreciation in this case would be $ 53,847.