Thanks for the clarification Jeff.

First, the land is separated from the improvements, with each assigned a percentage of the total value. (Can’t depreciate land.) The dollar value of the improvements are then divided by 27.5 to come up with annual depreciation. 27.5 is the number of years set by the IRS for residential income properties. It’s 39 for commercial.

That would be the most conservative way to go. I like a middle of the road strategy which will usually result in 4-5% of the total property value in annual depreciation — as opposed to about 3% or so using the above example. That would entail calculating separate ‘lives’ for various parts of the property — the roof would be an example.

At that point is begins to move from simple to fairly complex if one then gets serious about what’s known as ‘cost segregation’.

Don’t ask.

Great explanation and answer to my question. Another question in relation to your answer: Where did you come up with the $5000 figure in the first sentence? How is what depreciation allowed calculated on a property?

Thanks Jeff!

Break-even after tax is an entirely different set of facts.

Don’t be a stranger, OK?

All the while they realize their insistence on maintaining the status quo is shortening their lives as they watch the scale’s pronouncement.

The following comment sounds flippant but it needs serious consideration:
An obese person and an anorexic stand on the scale together and pronounce themselves jointly average. If you have fat properties and starving properties you are not doing okay, you are fooling yourself.

You own a rental, and it gives you $5,000/yr in depreciation. IRS rules say it will be used to ‘shelter’ the rental’s cash flow first, then you can apply it against your job income. However, if the property is a break even, and you make more than $150,000 a year at work, the entire $5,000 in depreciation has gone completely unused.

If this continues for say, five years, you’ve now accumulated $25,000 in ‘unused’ depreciation.

So if you then decide to make a move to improve your investment situation, you now may do a tax deferred exchange, but you will be able to apply the unused depreciation, if you choose to do so, against the capital gain you’re deferring.

Let’s say you need to replenish your Sominex Account. You could take $25,000 in cash from the exchange, offset it with the unused depreciation, and it won’t be taxed.

Make sense?