For federal income tax purposes, investment properties, such as rental properties, can be depreciated over a specified period. The IRS sets these periods. Depreciation is a non-cash expense, meaning it doesn't involve an actual outflow of cash, but it reduces taxable income. Land is not depreciable. Only the improvements (buildings) are depreciated.
Residential rental property is depreciated over 27.5 years under IRS rules.
Memorize the depreciation period for residential rental property (27.5 years). Understand that depreciation is a non-cash expense that reduces taxable income. Remember that land is not depreciable.
Related Terms
Related Concepts
The income approach estimates a property's value based on the income it generates by converting net operating income into a value estimate using a capitalization rate. It is the preferred method for income-producing properties.
Highest and best use is an appraisal concept that identifies the most profitable, legally permitted, physically possible, and financially feasible use of a property. It is the foundation of all property valuation.
The comparable sales approach estimates a property's value by comparing it to similar properties that have recently sold in the same market area. It is the most widely used and reliable approach for appraising residential properties.
The cost approach estimates a property's value by calculating the current cost to rebuild the improvements, subtracting accumulated depreciation, and adding the land value. It is most reliable for new construction and special-purpose properties.
Reconciliation is the final step in the appraisal process where the appraiser analyzes the value indications from all applicable approaches and arrives at a single final opinion of value. It is not a simple average of the three values.
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