Depreciation

Tax laws require that any real estate property you own and use for business purposes must be depreciated. This is not an option. Depreciation is the deduction from your taxes of the cost of the property over a 39-year period.

For example, if you paid $50,000 for a building, you would be allowed to take an annual tax deduction of approximately $1,282 in depreciation over the next 39 years. The depreciation amount represents the building’s price, divided by 39.

Depreciation is based only on the value of the building. When you purchase a property, your price includes both the cost of the building and the land. When you purchase a property that you will use for business purposes, know exactly how much of the cost is for the building, and how much is relegated to the land.

For example, if you paid $200,000 for a property, and 25% of this cost reflects the land value, the depreciation over 39 years would be $3846.15 per year. This figure is derived by first determining the percentage of the price that reflects the cost of the building - $200,000 x 0.75 = $150,000. Then, take this new figure -- which represents the cost of the building-only ($150,000) -- and depreciate it over 39 years, or $150,000/39 = $3846.15. In this example, you would be allowed to deduct $3,846.15 in depreciation from your taxes for the next 39 years.

If you are using only a portion of the building for business purposes, you will only be allowed to deduct a percentage of the depreciation. Again, the percentage you can deduct is directly affected by the amount of space dedicated solely to the business.

Using our previous example, if 30% of the space is for the business, you are only allowed to deduct 30% of the entire building’s depreciation, or $1153.80 ($3846 x 0.30).

This deduction is reported on Schedule C of Federal Form 4562 or Form 8829.