What is Depreciation? (eBook excerpt chapter 2.11)

A free sample from chapter 2 Accounting Fundamentals of our Landlord / Property Management in QuickBooks guide. Section 2.11 What is Depreciation? We hope you’ll become a customer today, or sign up for the free e-course.

We discuss this in another article as well about depreciation vs expenses.

If you have purchased a new car before, you already have experienced depreciation. As soon as that brand new car is driven off the lot, it loses significant value (it depreciates). As you continue to drive it, time and wear and tear continue to decrease the car’s value. The value of an older car is less than a new car because of depreciation.

For real estate, depreciation is a little different. First of all an older property will likely be worth more now than it was when it was first purchased because of the appreciation of property values. Appreciation is uncertain, though and not realized until you sell. Depreciation, for our purposes, is a tax issue.

Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.

Straight Line Depreciation uses a constant amount to depreciate every year for the useful life. It is equal to the adjusted basis minus salvage value, divided by the useful life. The yearly depreciation could change if the useful life decreased or substantial investments were made in the asset to increase its adjusted basis.

Accumulated Depreciation is the cumulative depreciation since acquisition of an asset. It is reported on the balance sheet as a reduction in the value of the related asset. The difference, asset value minus accumulated depreciation, is the asset’s “carrying amount” or “book value.”

See Also: IRS publications 946 regarding depreciation of real property and 527 regarding Residential Rental Property.

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