How is depreciation calculated in real estate?

Depreciation in real estate is primarily calculated based on the property's useful life, which reflects how long the property is expected to remain economically viable. This method recognizes that physical assets, like buildings, naturally deteriorate over time and lose value due to wear and tear, aging, and other factors.

In practice, the useful life is often predetermined by the IRS for taxation purposes, which typically stands at 27.5 years for residential properties and 39 years for commercial properties. This means that property owners can deduct a portion of the asset's value each year over that specified duration, allowing for a systematic reduction in the asset's book value on financial statements.

Calculating depreciation in this manner provides a structured approach that helps property owners manage their financial records and plan for the eventual replacement or major repairs of the asset. This systematic recognition of expense is also in alignment with Generally Accepted Accounting Principles (GAAP). Overall, focusing on the property's useful life reflects how the value is realized over time, making this understanding crucial for effective financial planning and tax strategy in real estate investment.