How to Calculate Depreciation When Property Value Increases
Depreciation tells you how much value the home has lost because of wear as it aged. Yet, the current year value does depend on the market in the location. Land values in the area can appreciate as house demand grows greater than the home property supply. Calculating the depreciated value to keep account of your home value when property values increase? First change your basis, the home value you are diminishing for wear.
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Instructions
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Find the fair market value for your home. Use the value similar homes sell for during the period the home prices went up. This value is a good estimate of the price an informed buyer would pay for the home. For the typical price, you want to use the median sale price.
Collect the listings on property sales for similar homes in your locality from the tax assessor at the county government's office. Similar homes resemble your home in size, style, age and condition. The office keeps records on all properties sold, with the sales price.
List the home sales in order and select the price in the middle. Note the appreciated land value and appreciated house value separately.
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Use the fair market house value as your basis, beginning with the year the property value first went up. Do not include the land value since the depreciation accounts for wear on only the physical structure over its life. By changing the basis from the purchase price to the fair market value, you account for the increase in property value.
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Calculate the annual depreciation. Now you are ready to use a standard formula, with your new basis in the place for cost. The straight line method formula involves a simple calculation you can do on paper or with a calculator: Annual Depreciation = Cost/Years of Useful Life. The useful life covers the period until the house has no value.
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Total the depreciation for the period with higher property values. Depreciate the house value for each year in the period with a higher property value. Add up the annual depreciations. This number gives you the amount the physical structure depreciated during the period.
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To find the depreciation rate over the period, simply divide the total depreciation by the fair market value. You can also see the portion of the value that the period's depreciation takes away from the home. Subtract the total depreciation from the fair market value. Look at how much value the house lost during the period.
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Tips & Warnings
• Compare apples to apples when finding the fair market value for your home. Including a bigger home or a modern style home in the home sales list will inflate the value.
• Note that the fair market value does not necessarily tell you the price your home would actually sell for. The dollar amount gives you a good value estimate useful for calculating depreciation.
• Before you calculate depreciation, do a home inspection to determine that the house has undergone only normal wear.
