A study of the depreciation of office buildings and residential rental properties showed that the benefit of claiming the deduction of building tax is greater than that of residential properties. The results of this study were similar to those of Hulten and Wykoff’s. Most studies look at the tax depreciation of office buildings only. But one study looked at industrial, retail, and residential rental buildings. The findings were not completely surprising.
For tax purposes, building owners use a straight-line method to determine the amount of money they can deduct every year. They first estimate the useful life of a building and then deduct the dollar value result each year for the depreciation period. The straight-line method is generally used for residential properties. It requires estimates of the useful life of a building, which is then multiplied by its current market value.
Nonresidential structures depreciate at a straight-line rate over 39 years. A similar structure can be written off over five years. It’s important to note that the amount written off each year is related to the taxpayer’s business. The fact is, all buildings need repairs and replacement. Recent tax legislation allows building owners to depreciate assets as they are replaced. This way, they can minimize their tax liability.
The TCJA makes it easier to claim the building tax depreciation of a nonresidential property. The threshold for the asset acquisition phaseout has increased from $2 million to $1 million. In addition, the cost of the internal structural framework of the building will be depreciated straight-line over fifteen years. With these improvements, the depreciation of office buildings will be higher than for residential buildings.
Commercial buildings fall under two categories: those used for installing machinery and plant. They also fall under the category of MOBs. Both types of structures are temporary erections. They do not qualify for building tax depreciation. These types of buildings will not qualify for the tax deduction. But in some cases, the tax benefits will be great. And for some, it will not matter. The money is still there and will be worth it.
When calculating building tax depreciation, it’s important to consider the life expectancy of the structure. A nonresidential structure will be depreciated over 39 years, while a residential structure will be written off over two7.5 years. This is a relatively slow write-off period compared to historical standards, but it is the only way to claim a full deduction on a building. Using the same rules for nonresidential buildings reduces the cost of an existing rental property.
In addition to allowing depreciation, lawmakers can also phase in the new system. The goal is to treat both old and new structures equally. Then, they can choose the method that works best for the owner. A building tax depreciation schedule will give the property investor an idea of the total amount of tax depreciation. The timeframe will depend on the life expectancy of the building, but the longer the building is held, the higher its value.