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?