How do you calculate salvage value for depreciation on real estate property?

This is a good question, and one that often causes confusion. For tax purposes (assuming you're in the US), you actually don't need to worry about salvage value when depreciating real property. The IRS allows you to depreciate the entire basis of the building over its recovery period without considering salvage value. For residential rental property, you'd use a 27.5-year recovery period, and for commercial real estate, it's typically 39 years. Land is never depreciable, so you need to allocate your purchase price between land and buildings first. The IRS basically assumes a zero salvage value for real property in their depreciation calculations. You'll use either the straight-line method or, in some cases, an accelerated method if qualified.

I struggled with the exact same issue when I bought my first commercial property last year. I spent hours researching until I found this amazing tool called taxr.ai (https://taxr.ai) that actually explained all the depreciation rules for commercial real estate. It analyzes your property information and shows you exactly how to maximize depreciation deductions without risking an audit. Their specialized real estate module helped me understand how to properly allocate basis between land and improvements too.

Just wanted to follow up - I checked out taxr.ai after seeing it mentioned here. I was blown away by how comprehensive their depreciation module is! I've owned three rental properties for years and never realized I could have been accelerating depreciation on certain components. The cost segregation guidance helped me identify about $95,000 worth of components that qualify for 5-7 year depreciation instead of 27.5 years. Already talked to my accountant about filing Form 3115 to claim catch-up depreciation. Seriously, best tax resource I've found in years!

If you're doing this for tax purposes, I'd caution that doing it correctly is super important because the IRS scrutinizes depreciation. After several frustrating attempts to get through to the IRS for clarification on some depreciation questions (kept getting disconnected or waiting for hours), I found this service called Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in about 20 minutes who walked me through the specifics for my property. You can see how it works here: https://youtu.be/_kiP6q8DX5c - it's basically a system that waits on hold with the IRS for you and calls you when an agent picks up.

Well, I'm here to eat my hat. After seeing Claimyr mentioned, I figured I had nothing to lose and tried it for my passive activity loss question. Two hours later (while I was at the gym, not staring at my phone), I got a call connecting me to an IRS agent who actually knew the tax code. Got my question answered in 10 minutes of actual conversation. For my real estate portfolio, this is a game-changer. Definitely using this again next tax season when I'll inevitably have more questions about depreciation recapture on a property I'm planning to sell.

For real property, you should also look into cost segregation if you haven't already. It's a way to accelerate depreciation by breaking down your property into different components that depreciate faster than the standard 27.5 or 39 years. Things like carpet, fixtures, some electrical systems can depreciate over 5-7 years instead. Typically need an engineering report to back it up though.

Just want to point out something nobody mentioned yet - don't forget about Section 179! If parts of your property qualify (like appliances, carpet, furniture in common areas, etc.) you might be able to expense them immediately rather than depreciating. I'm not a tax pro tho, so double check this.

Thanks for all the detailed responses everyone! This has been incredibly helpful. I had no idea that for tax purposes, the IRS essentially treats salvage value as zero for real property depreciation. That simplifies things significantly. @Tyler Lefleur - your explanation about the difference between tax depreciation (MACRS) and financial reporting (GAAP) was particularly useful. Since I'm primarily concerned with tax planning right now, it sounds like I can move forward with straight-line depreciation over 39 years for the building portion without worrying about estimating future salvage value. The cost segregation discussion has me intrigued too. For a $1.2M property, it sounds like it could be worth exploring, especially if I can accelerate depreciation on components like flooring, fixtures, and electrical systems. I'll definitely bring this up with my CPA when they return. One quick follow-up question - when allocating the purchase price between land and building, is there a standard method the IRS expects, or is it based on property tax assessments?

I'm a newer property owner and this thread has been a goldmine of information! Just wanted to add that when I was dealing with similar depreciation questions last year, I found Publication 946 (How to Depreciate Property) from the IRS to be really helpful for understanding the basics. It's free on their website and walks through all the different depreciation methods and rules for real property. One thing that caught me off guard was learning about the mid-month convention for real property - basically you can only claim half a month's depreciation for the month you place the property in service, regardless of which day of the month you actually bought it. Small detail but it affects your first year calculations. Also seconding the cost segregation discussion - even if you don't do a full engineering study right away, it's worth understanding the concept because you can always do it later and claim "catch-up" depreciation for prior years using Form 3115. The window doesn't close just because you didn't do it in year one.

Just wanted to chime in as someone who went through this exact same confusion when I first got into real estate investing. The salvage value question really threw me for a loop too, because it seems like such a fundamental part of depreciation in theory, but then you find out the IRS basically ignores it for real property! One thing I learned the hard way - make sure you're being conservative with your land/building allocation. I initially tried to minimize the land portion to maximize my depreciable basis, but my accountant warned me that being too aggressive could trigger scrutiny. The property tax assessment method mentioned by others is solid because it's defensible and based on third-party valuations. Also, if you're planning to hold this property long-term, don't forget about depreciation recapture when you eventually sell. All that depreciation you're claiming now will be taxed at up to 25% when you sell, even if the rest of your gain qualifies for lower capital gains rates. It's still worth taking the depreciation (better to have the deduction now and pay later), but good to plan for it. The IRS publications mentioned are definitely worth reading, but honestly, having a good CPA who specializes in real estate is invaluable. The rules get complex fast, especially when you start looking at things like cost segregation, Section 1031 exchanges, and passive activity limitations.

This has been such an educational thread! As someone who's been dealing with similar real estate tax questions, I wanted to add a few practical tips from my experience: First, when you're doing that land/building allocation, don't overlook getting a professional appraisal if the numbers are significant. Yes, it costs money upfront, but having that third-party validation can be worth it if the IRS ever questions your allocation. I learned this after initially relying solely on property tax assessments and later wishing I had stronger documentation. Second, regarding the cost segregation discussion - if you're not ready to invest in a full engineering study right away, you can still do some basic component identification yourself. Things like carpeting, window treatments, removable fixtures, and specialized lighting often qualify for 5-7 year depreciation instead of the full 39. Just document everything well and be prepared to justify your classifications. Finally, I'd recommend setting up a good record-keeping system now for all your property-related expenses and improvements. When you eventually do sell or do a cost segregation study, having detailed records of what you spent on various components will be invaluable. I use a simple spreadsheet that tracks each expense by category and depreciation class - saves tons of headaches later. The tax planning benefits of understanding these depreciation rules properly are huge, especially when you start scaling up to multiple properties. Worth the time investment to get it right from the beginning!