Residential Real Estate
Study Paves Way for Improvement in Real Property Tax Depreciation
Randall Weiss, Tax Partner in the National Tax Office of Deloitte & Touche and the lead author of the study, said, "The economy as a whole, as well as building owners, would benefit from an improvement in the depreciation system for structures. An improved depreciation system would remove disincentives facing individuals and businesses investing in real estate. The ability to claim deductions that more accurately reflect the economics of holding property would make real estate investments much more viable as investors consider their options." The Deloitte & Touche study, the first broad examination of depreciation of structures in 20 years, suggests that tax depreciation should be updated to reflect the actual rates at which building investments lose value as they age. Using regression analysis, Deloitte & Touche consultants estimate from market data the annual rate of loss of value (called economic depreciation) of the original investment in a building. Regression analysis is a statistical technique that allows separating the effect of age on a building"s value from effects of other influences such as location. The authors conclude that, if the straight-line method of depreciating an entire structure is retained, the recovery period necessary to make tax depreciation correspond to economic depreciation is 20 years or less, significantly shorter than the present 27.5- and 39-year periods. Under current tax law, section 168 of the Internal Revenue Code, the depreciation deduction for structures does not provide appropriate tax benefits because investors are forced to recover their costs more slowly than the structures" actual loss of value. The deductions are determined by using a straight line accounting method and a recovery period of 39 years for non-residential property and 27.5 years for residential property. A $390,000 investment in non-residential property, for example, would allow an investor a $10,000 deduction each year for 39 years. The basis for computing each year"s deduction ignores the inflation that has occurred since the original investment, giving investors less-than-optimal incentives to invest in real estate. Previous research understated the rate of economic depreciation, and thus overstated the appropriate recovery periods, because it neglected to account for the substantial expenditures building improvements after original construction. Spending on these upgrades boosts the value of a building, and thus causes understatement of the true rate of loss in the value of the original construction. The Deloitte & Touche study takes steps to reduce the effect of this spending on the economic depreciation estimates. In addition, the Deloitte & Touche study relies on more recent transactional data, whereas previous studies used data based on 1950s and 1960s property values. "The fact that our study is based on current real estate values and considers the effects that renovations have on depreciation makes the study have immediate policy implications," Weiss said. The text of the study is available at www.us.deloitte.com/realest/DepreciationStudy.Multi Family Offices Asia commented:
You have shared really brilliant information regarding the Real Estate values. Thanks for an updated post.
18.04.2012