馃攳
Real Estate Math Video #13 - Calculating Depreciation | Real Estate Exam Prep - YouTube
Channel: The Real Estate Classroom
[0]
[Music]
[0]
hey everyone my name is paul pacheski
[2]
and welcome to the real estate classroom
[4]
youtube channel in today's video this is
[6]
real estate math video 12 of 15 and i'm
[9]
going to show you how to calculate
[11]
depreciation it is a mathematical
[13]
calculation that you will need to know
[15]
for your real estate exam
[18]
okay so what is depreciation well there
[20]
are a couple of different types of
[21]
depreciation and real estate that we
[23]
have to be familiar with
[25]
the first one is the type of
[26]
depreciation that we
[28]
use to for the calculation of the cost
[30]
approach to appraisal
[32]
that's not what we're going to discuss
[33]
here in this video in today's video
[35]
we're going to talk about
[36]
depreciation in a tax
[40]
for tax purposes so that is the intent
[42]
of today's video
[45]
now for income tax purposes real estate
[47]
is depreciated
[49]
on a straight-line basis that's a common
[53]
term that we're going to have to know as
[55]
a real estate professional a
[56]
straight-line basis that just simply
[58]
means to depreciate or something is
[60]
going to depreciate
[61]
over a certain number of years
[64]
so the irs has has indicated or the irs
[67]
said a rule that says residential
[69]
property
[70]
that's being used as investment property
[72]
and that's the key
[73]
residential property being used as
[75]
investment property is going to be
[77]
depreciated over
[78]
a 27 and a half year period
[81]
commercial or industrial property is
[83]
going to be depreciated
[85]
over a 39-year period so
[88]
that's where the calculations come in
[90]
that we have to know
[92]
so let's look at a practice exam
[94]
question that you might have on your
[96]
exam that is going to
[98]
ask for you to figure out the
[99]
depreciation so it says a 12 unit
[102]
apartment community sold for five
[104]
hundred thousand dollars
[105]
the purchaser paid twenty five thousand
[107]
dollars in closing cost
[109]
or sometimes called acquisition cost
[113]
the land represents 25 of the total
[116]
value
[117]
how much depreciation can be taken each
[121]
year for
[121]
tax purposes so there's a lot of things
[125]
within that test question that we have
[127]
to be able to use for our calculation
[131]
so first of all the 500 000
[134]
represents the total valuation
[138]
that we're going to use for our
[139]
calculation remember the purchaser paid
[141]
twenty five thousand dollars
[142]
in closing costs or accus acquisition
[146]
cost which we're going to add into that
[148]
half a million dollars
[150]
but it's important to remember when
[151]
calculating these
[153]
the land itself the raw land that the
[156]
improvements set on
[158]
we do not depreciate all right so we're
[161]
only depreciating what we call the
[164]
the building or improvement value so the
[167]
land represents 25 percent of the total
[169]
value so we're gonna have to figure that
[171]
out so
[172]
the the test question wants to know how
[175]
much
[175]
depreciation can be taken each year for
[178]
tax purposes so let's take a look at how
[180]
we calculate that
[182]
so there are three steps to this the
[185]
first step is and remember we cannot
[187]
calculate or we cannot depreciate land
[189]
value so the first thing we have to do
[191]
is get our basis so the first thing
[192]
we're going to do is add that
[195]
value or that purchase price of five
[197]
hundred thousand to
[198]
the twenty five thousand dollars in
[200]
closing cost or acquisition cost
[203]
and that gives us a total of five
[205]
hundred and twenty five
[207]
thousand dollars that's step one
[211]
now step two we take that 525
[214]
000 and we multiply it by
[218]
75 now remember as i said
[221]
land cannot be depreciated so
[224]
if 25
[228]
is the land value of the total we have
[230]
to
[231]
minus out that 25 we cannot take
[233]
depreciation on it so the easiest thing
[235]
to do is
[236]
is to take the 525 000 and multiply it
[239]
by 75 percent which
[241]
represents the building percentage or
[244]
the
[245]
the improvement percentage when we do
[247]
the calculations
[249]
we come up with 393 750 dollars
[254]
that is our depreciation basis
[257]
step three we take that
[260]
that basis that 393 750
[264]
and we divide it by 27 27.5 now that
[269]
27.5
[271]
is that straight-line depreciation of 27
[274]
and a half years that the irs says that
[276]
we use
[276]
for residential property because
[278]
remember apartment communities are
[281]
uh considered residential in nature
[284]
so when we do the division you're gonna
[286]
the the answer to the question
[288]
how much depreciation can be taken each
[291]
year for tax purposes
[293]
the answer is fourteen thousand three
[295]
hundred and eighteen dollars and
[297]
eighteen cents that is the annual
[301]
depreciation so that means that investor
[303]
for the next twenty seven and a half
[304]
years is going to be able to take
[306]
fourteen thousand three hundred and
[308]
eighteen dollars and 18 cents
[310]
and apply that towards their their uh
[313]
income taxes
[314]
all right now i want to go one step
[316]
further because occasionally
[319]
the test question may be phrased like
[321]
this
[322]
and i have it on your screen the last
[323]
sentence it'll give you i've used the
[325]
same scenario but it says how much
[327]
depreciation would the investor realize
[330]
over
[331]
the first five years for tax purposes so
[334]
the previous
[335]
uh way we calculated it was real simple
[338]
we're just going to find out what each
[339]
individual year
[340]
what's the what's the depreciation for
[343]
each individual year here they want to
[344]
know the first five years
[346]
so we actually do step one through three
[348]
just like normal
[349]
but we have to add a step onto it and
[352]
what we do is we take that
[353]
annual depreciation that 14
[356]
318 dollars and 18 cents and we simply
[360]
multiply it by
[362]
five years so when we do the
[364]
multiplication we take fourteen
[366]
thousand three hundred and eighteen
[367]
dollars and eighteen cents we multiply
[370]
it by five which represents the five
[372]
years that the test question is asking
[374]
for
[375]
and that gives us a total of seventy one
[377]
thousand five hundred and ninety dollars
[379]
and 90 cents
[380]
that would be the answer to this test
[383]
question
[384]
okay if you're going to continue
[386]
studying real estate math check out this
[387]
video
[388]
right here and if you have not
[389]
subscribed to the channel please do so
[391]
click the little circle
[392]
to my left share this with somebody that
[395]
you know might be
[396]
studying for the real estate exam i
[398]
would appreciate it comments and
[400]
questions
[400]
down below that's all i got folks i'll
[402]
see you in the next video
Most Recent Videos:
You can go back to the homepage right here: Homepage