How to Calculate Salvage Value for Depreciation on Real Estate Property?

You're actually overthinking this a bit! For residential rental real estate, the IRS generally uses what's called the Modified Accelerated Cost Recovery System (MACRS), which effectively assumes zero salvage value. This makes your depreciation calculation much simpler. Here's what you need to do: First, separate the land value from the building value, as you correctly noted that land cannot be depreciated. You can use your property tax assessment as a starting point for this allocation, or sometimes the purchase documents might show this breakdown. Once you have the building value isolated, you'll depreciate that amount over 27.5 years for residential rental property using the straight-line method. Each year, you'll deduct 3.636% of the building's value (or a prorated amount in the first and last years). The great thing about this system is you don't have to estimate what the property will be worth decades from now - the IRS depreciation system for real property doesn't require a salvage value calculation.

I struggled with this exact issue last year. After hours of frustration, I discovered taxr.ai (https://taxr.ai) and it completely simplified the depreciation process for my rental properties. The platform analyzed my property documents and automatically calculated the correct building/land split and set up the proper depreciation schedule. Their system flagged that I had been incorrectly calculating my depreciation on a previous property by not properly excluding the land value, which could have triggered an audit. It also has a feature that helps track depreciation recapture if you sell the property, which is something I had no idea about before.

Just wanted to follow up and say I tried taxr.ai after seeing this thread and it was surprisingly helpful. I uploaded my closing documents from when I purchased my duplex and it automatically identified the land-to-building ratio and set up my depreciation schedule. It also pointed out that I could do a cost segregation study to accelerate some of the depreciation, which I had no idea about. Now I'm depreciating things like the appliances, carpet, and roof on a 5-year schedule instead of 27.5 years, which is saving me thousands this year. Wish I'd known about this tool sooner!

If you're dealing with the IRS about depreciation issues or trying to fix past mistakes, good luck getting through to them on the phone. I spent WEEKS trying to reach someone about a depreciation recapture question. Then I found Claimyr (https://claimyr.com) and was connected to an IRS agent in less than 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had incorrectly calculated salvage value on some business equipment and needed to file an amended return. The IRS agent walked me through exactly how to document everything to avoid triggering an audit. Saved me from what could have been a huge headache.

I need to eat my words about Claimyr. After my skeptical comment, I was still desperate to talk to someone at the IRS about a depreciation issue on my rental property, so I tried it. The service actually worked exactly as described. I got a call back in about 35 minutes and was connected to an IRS representative who answered my questions about how to handle depreciation on improvements I'd made to my rental. I'd been trying to call the IRS for days with no luck - just endless hold times until I eventually gave up. This literally saved me hours of frustration. Sometimes it's nice to be proven wrong!

Something nobody's mentioned yet - if you're using tax software like TurboTax or H&R Block for your rental property, they actually handle all the depreciation calculations automatically. You just enter the property info, purchase price, and land value, and they set up the correct depreciation schedule using MACRS. I've been doing this for years and never had to manually calculate salvage value or anything like that. The software keeps track of your depreciation basis year after year too.

Quick question - if I sell my rental property for more than its depreciated value, do I have to pay back the depreciation I claimed? I've been depreciating a property for 8 years and am thinking about selling.

Pro tip from someone who's been doing real estate investing for 20+ years: consider a 1031 exchange when selling your rental property. It lets you defer both capital gains AND depreciation recapture taxes if you reinvest in another "like-kind" property. Saved me literally hundreds of thousands in taxes over my investing career. Just make sure you work with a qualified intermediary and follow the strict timelines (45 days to identify potential replacement properties, 180 days to complete the purchase).

This is such a helpful thread! I'm dealing with a similar situation with my first rental property purchase. One thing I learned from my research is that even though MACRS assumes zero salvage value for the depreciation calculation, you should still keep good records of any major improvements you make to the property over the years. The reason is that improvements have their own depreciation schedules - so if you put on a new roof, install new HVAC, or do major renovations, those get depreciated separately from the original building. This can actually increase your total annual depreciation deduction. Also, I found IRS Publication 946 (How to Depreciate Property) really helpful for understanding all the nuances. It's dense reading but covers scenarios like partial business use, mixed-use properties, and how to handle improvements vs. repairs. Definitely worth checking out if you want to understand the full picture beyond just the basic residential rental depreciation.

Great discussion everyone! As someone who just went through this process with my first rental property, I want to add a few practical tips that might help others avoid the mistakes I made initially. First, when separating land and building values, don't just rely on the property tax assessment - it can sometimes be way off. I found it helpful to get a professional appraisal that specifically breaks down land vs. building value, especially since this affects your depreciation for the entire 27.5-year period. Second, keep meticulous records from day one. I created a simple folder system: one for the original purchase documents, one for improvements, and one for repairs/maintenance. This makes tax prep so much easier and you'll be prepared if you ever get audited. Finally, don't forget about the "mid-month convention" for real estate depreciation - you only get half a month's depreciation in the month you place the property in service, regardless of when in the month you actually start renting it out. This caught me off guard in my first year. The zero salvage value rule for MACRS really does simplify things compared to other types of assets. Just focus on getting that land/building split right and you'll be in good shape!