Question

Depreciation of Commercial Property is calculated by dividing the value of the ____________________by ______________(how many years)?

Answer 1

The term commercial property (also called commercial real estate, investment or income property) refers to buildings or land intended to generate a profit, either from capital gain or rental income. Commercial building owners investing in real estate are tasked with handling the management, maintenance, taxes, insurance and accounting of the property. Commercial real estate can include land, building(s), and associated land improvements that are either constructed or acquired from an investor or a business entity.

Commercial and residential building assets can be depreciated either over 39 year straight-line for commercial property, or 27.5 year straight line for residential property as dictated by the current U.S. Tax Code. The Internal Revenue Service (IRS) allows building owners the opportunity under the Modified Accelerated Cost Recovery System (MACRS) to depreciate certain land improvements and personal property over a shorter period than 39 or 27.5 years. Certain land improvements can be depreciated over 15 years at 150% DB, with certain personal property depreciated over 7 or 5 years at 200% DB. This depreciation analysis is known as a cost segregation study.

Depreciating investment property can be a significant tax benefit. Depreciating commercial property is different than depreciating residential property, and these differences can be used to take full advantage of the tax benefit.

Straight Line Depreciation

Step 1

Calculate the total cost basis of the commercial property you are depreciating.

Step 2

Divide the total value by 39 to get your annual depreciation on a straight line basis.

Step 3

Apply the depreciation to your taxes annually for at least 39 years until the property has been fully depreciated.

Cost Segregation Depreciation of Commercial Property

Step 1

Separate the commercial property asset using an engineering report into four separate categories: personal property, land improvements, the building and land.

Step 2

Depreciate the amounts allocated to personal property over five to seven years using a double declining method.

Step 3

Depreciate the amount allocated to land improvements over 15 years using an accelerated method, such as the 150% declining balance method.

Step 4

Depreciate the components of the building separately to take advantage of different tax benefits. For example, although the roof is part of the building, you may be able to depreciate it more quickly separately.

Step 5

Allocate the remaining amount to the land category.