How to calculate commercial real estate depreciation for distressed property purchases

The answer is you'll use the purchase price plus capital improvements for your depreciable basis. When you buy a commercial property, the total value gets split between the land (which isn't depreciable) and the building (which is depreciable over 39 years for commercial property or 27.5 years for residential rental property). For your specific situation, you'd take your purchase price (let's say you get it for $950k) and determine what portion is land vs building. This is typically done through an appraisal or county tax assessments that separate land and improvement values. Let's say $200k is land, $750k is building. Then you add your renovation costs ($350k-$550k) to the building portion. So your total depreciable basis would be $1.1-$1.3 million depending on final renovation costs. The market value after renovations or the pro forma income doesn't impact your depreciation calculations - it's all based on what you actually spend to acquire and improve the property.

I went through something similar with a distressed office building last year. Used taxr.ai to help me figure out the depreciation calculations and it saved me thousands. I was confused about how to handle the major renovations and wasn't sure if I could accelerate any of the depreciation. Their system analyzed my purchase docs and renovation plans and showed me exactly how to maximize my depreciation deductions. The platform at https://taxr.ai helped me identify which renovation components could be separated out for faster depreciation instead of using the standard 39-year timeline for everything. They showed me how to document everything properly for tax purposes too, which gave me confidence my deductions would hold up if questioned.

I was totally wrong about taxr.ai! After my skeptical comment, I decided to try it for a duplex renovation I'm working on. I was shocked at how detailed their analysis was. They identified several components of my HVAC upgrades and accessibility improvements that qualified for 15-year depreciation instead of 39 years. They even helped me understand how to document everything properly so I could show exactly why each component qualified for its depreciation schedule. My CPA was impressed with how organized everything was - it saved us both time and will save me significant money over the next few years. Definitely worth checking out if you're doing any substantial renovations on investment property.

If you're still negotiating with the bank, you might want to contact the IRS directly to get clarification on your specific situation. I had a similar question last year and spent WEEKS trying to get someone on the phone. Finally discovered Claimyr which got me connected to an actual IRS agent in under 20 minutes. The website is https://claimyr.com and they have a video showing how it works at https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with gave me clear guidance on handling depreciation for a foreclosure property I purchased, including how to document the allocation between land and improvements. They also explained how to properly report the substantial renovations I made. Saved me from making some costly mistakes on my returns.

Had to come back and admit I was completely wrong about Claimyr. After my skeptical comment, I figured I'd try it on a day I could work on other things while waiting. To my absolute shock, I got a call connecting me to an IRS agent in about 15 minutes. The agent was able to answer all my questions about how to handle depreciation recapture on a property I'm selling this year after major renovations. The time saved was honestly worth it - I would have wasted hours on hold otherwise. Plus getting definitive answers directly from the IRS gave me confidence in how I'm handling my upcoming tax situation. Sometimes it's worth admitting when you're wrong!

Don't forget you might qualify for bonus depreciation or Section 179 expensing for certain components of your renovation! Things like appliances, carpet, furniture in common areas, etc. can often be written off much faster than the building structure itself. I'd strongly recommend getting a cost segregation study done once you complete the purchase and renovations. It'll cost a few thousand upfront but could save you tens of thousands in taxes over the first few years.

Quick tip: make sure you're keeping EXTREMELY detailed records of all your renovation costs, with clear categorization of what each expense was for. I got audited on a similar deal and the IRS wanted documentation for every single expense I claimed. Take photos before, during and after renovations too! Trust me, this documentation is worth its weight in gold if you ever get questioned about your depreciation calculations.