How to Calculate Your Home's Actual Value Minus Depreciation
Knowing the depreciated value of your home will prove valuable should you decide to rent it. While real estate is an appreciable asset, it is considered to be depreciating when reporting rental income. The rationale is that an older rental property becomes less attractive to tenants over time. To properly determine the depreciated value of your home, you need certain specific information. Starting with the tax assessed value of the building -- independent of land -- you will need to determine the recovery period, the original closing costs and the value of any improvements and the costs of the fixed items within.
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Instructions
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Obtain the tax assessed value on the property. Contact your city's tax assessor to obtain the value if you can't locate your copy. For example, say the property you purchased in January 2005 is assessed at $150,000 in 2011.
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2
Determine the recovery period, also known as the useful life, of your property. Use the Modified Cost Recovery System depreciation method for properties put into service after 1987. Use the guidelines in Internal Revenue Service Publication 534 (see Resources) for properties placed in service prior to 1987. Per the MACRS method, the recovery period for a residential property put into use in 2005 is 27.5 years.
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Retrieve a copy of your HUD-1 from the original closing. Add up the closing costs, excluding buyer expenses such as taxes, insurance and interest. For example, all closing costs add up to $4,500.
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Add the costs of improving the property upon purchase. If you put $30,000 in improvements into the building, these improvements also carry a recovery period of 27.5 years.
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Add the values of the fixed items in the home, such as furniture and appliances. If the value of the fixed items in the house is $15,000, divide this figure by the useful life, which is five years. The resultant figure is $3,000 per year.
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Add the assessed value ($150,000), closing costs ($4,500) and improvements ($30,000). The sum is $184,500. Divide this figure by 27.5 to come up with $6,709.09. This is the amount the property will depreciate per year.
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Add the figure from Step 5 to the figure from Step 6 to get $199,500.
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Add $3,000 to the $6,709.09 to get the depreciation for the first five years, or $9,709.09.
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Subtract $9,709.09 from $199,500 for each year from 2005 until 2010 to get a depreciated value of $150,954.55.
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Subtract $3,000 from $9,709.09 to arrive back at $6,709.09 now that the useful life of the household items has been depleted.
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Subtract $6,709.09 from $150,954.55 to get $144,245.46, the depreciated value as of 2011. Subtract $6,709.09 each year going forward to obtain the depreciated value for that particular year. In this example, you would continue this process until the property reaches the end of its useful life in June 2032.
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