Calculating Depreciation on Commercial Property: A Step-by-Step Guide

Jun 16, 2024

Understanding depreciation on commercial property is crucial for property owners and investors. Depreciation allows you to recover the cost of your property over time, easing your tax burden. This guide will walk you through the steps to calculate depreciation on commercial property.

Step 1: Determine the Property's Basis

The first step in calculating depreciation is to determine the basis of your property. The basis is generally the cost of the property, including any expenses related to its purchase. These expenses can include legal fees, recording fees, and transfer taxes.

For example, if you bought a property for $500,000 and incurred $10,000 in related expenses, your total basis would be $510,000.

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Step 2 property over 39 years, using the straight-line method. The straight-line method spreads the cost evenly over the recovery period.

To calculate the annual depreciation, divide the basis by the recovery period. Using our earlier example, the annual depreciation would be $510,000 / 39, which equals approximately $13,077 per year.

Step 3: Understand Partial Year Depreciation

If you acquire the property partway through the year, you will need to calculate partial year depreciation. The IRS allows you to take a half-year's worth of depreciation in the first year, regardless of the actual purchase date.

For instance, if you bought the property in July, you would still take half of the annual depreciation for that year. In our example, that would be $13,077 / 2, resulting in $6,538.50 for the first year.

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Step 4: Deductions

Once you have calculated your annual depreciation, you can apply this amount as a deduction on your tax return. This deduction can significantly reduce your taxable income, providing substantial tax savings.

It's important to keep detailed records of your calculations and any changes to your property that might affect its basis. This includes improvements or renovations, which can increase the property's basis and, consequently, the annual depreciation amount.

Step 5: Review and Adjust Annually

Depreciation is not a set-it-and-forget-it process. You should review your calculations annually and adjust for any changes in the property's basis. This can include new improvements or changes in ownership.

Working with a tax professional can ensure you are maximizing your depreciation deductions while staying compliant with IRS regulations. They can also help you navigate any complexities that arise from changes to your property or tax laws.

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By following these steps, you can effectively calculate and apply depreciation on your commercial property. This can lead to significant tax savings and a better understanding of your property's financial performance.

Calculating depreciation on commercial property can optimize your tax benefits and investment evaluations. At Atlantic Commercial Lending, we’re here to guide you through the complexities of commercial real estate finance. Contact us for personalized financial solutions and make the most of your commercial property investments.