Depreciation means that a building theoretically loses some of its value each year because of damage from the weather, wear and tear, and newer features of competing buildings. While your building may actually increase in market value, the tax laws assume that its value is decreasing and that it will be worth-less at the end of a specified time. Depreciation rarely reflects the actual decline in the market value. But it provides a deduction that cuts down your cost of buying your property. Buildings erected on he owner's land are depreciable. Paving, private streets, curbs and gutters, railroad spurs, and other improvements that have a limited useful life are also depreciable.

Land isn't depreciable. It hasn't a useful life. Land-preparation costs are non-depreciable, unless the costs are in connection with a depreciable improvement. Landscaping isn't depreciable, unless the shrubbery and trees will have to be destroyed at the end of the life of other improvements. In such a case, the landscaping is depreciable over the same useful life as the other improvements.

Depreciation can be taken on business assets even when they aren't in use, such as a rental dwelling without a tenant. A vacant building awaiting resale isn't depreciable, because it's neither used in the trade or business nor held for the production of income.

Deductions for depreciation offset ordinary income. They reduce the basis of the property. When you sell the property, your gain is the difference between the amount realized and the adjusted basis. This may be subject to a capital-gains tax.

If you plan to sell one piece of property and invest it to proceeds in another, you should consider the tax advantage of an exchange. You can sell property without recognizing any gain or loss on the transaction.

The property you get in the deal assumes the cost basis of the property you traded for it. You calculate the original cost less the depreciation you have taken plus the improvements you have made in the years you held the property. That becomes the adjusted cost basis you will use on the new property. It's called a "substantial basis."

A trade is usually more advantageous if your property is now worth more than iis original basis. The exchange gives you an equivalent value, bu[ you escape the immediate tax you would incur on the appreciation of value if you sold ihe old property 10 buy the new one. If your property is worth less than iti basis, you should: sell it outright and take the benefit of any deductible Joss on your tax return.

The exchange of property often occurs wiih both or at least one of the properties having an existing mortgage- When an investor is relieved of debt by an exchange and the new debt is less than the old, the difference is treated as a boot. This difference is often referred to as the net liability or net debt.

An exchange of a personal residence for business property doesn't qualify for either the rollover "residence replacement rules or a lax-deferred exchange (1031). You cannot mix personal with business property and defer The lax on the disposal of your old property. However if you move out of your house and rent it to the others, thereby converting it to business property, it can qualify for the tax-deferred exchange.

 

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