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Good information source how to compute depreciation fro commercial real estate.

Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age.  The cost of reproducing an income property can be recovered over the useful life of the asset which is determined by law.  Depreciation is treated as an expense and is a line item on an income statement.  Depreciation can only be applied to the building and not the land, since land does not wear out over time.  Residential income property must be depreciated over a 27.5 year period using straight line depreciation.  Commercial income property must be depreciated over 39 years using straight line depreciation.  Straight line depreciation stipulates that an asset must be depreciated by equal amounts each year over its useful life.

Example:  You purchase a warehouse for $900,000.  The land where the warehouse resides is valued at $120,000.  The building is valued at $780,000.  Current law allows you to depreciate commercial properties by equal amounts annually over 39 years.  Your depreciation deduction for the first year is based on the mid month convention.  The day of the month that you purchase the property doesn’t matter.  You can only deduct half of the first months depreciation.  If you put the warehouse into service on June 1, you are allowed to deduct 6 and 1/2 months of depreciation for the first  year.

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