Can Depreciation Be Taken on a Condo?

With depreciation, the decline in the value of an asset is calculated over time for prorated tax breaks. The prorated tax breaks are recorded as an expense against income. The Internal Revenue Service allows the depreciation tax break in the case of condominiums used as investment property but not as owner-occupied units. Real estate investors can free up a portion of their cash flow via depreciation, allowing them to maintain their properties.

Term of Depreciation

You can depreciate the cost of the condo building itself over 27.5 years, equal to 3.64 percent of the cost of the unit per year. Be sure to take depreciation each tax year. If you sell the condo, the IRS puts depreciation back into the cost basis of the property whether you exercised this tax break or not.

Building Value

Figure out the value of your condominium building separate from the land value of the property, as the IRS allows depreciation on the value of the building only. In certain cases, condo owners are deeded only the building itself. Property tax bills list the tax basis of the building, giving you a figure to work with in taking depreciation on your federal taxes. If you use a different basis for depreciation other than the figure shown on your property tax, the IRS is likely to ask for documentation to back up your claim.

Condo Expense Calculation

Tax-deductible expenses are subtracted from income on the property. The IRS allows you to deduct operating expenses such as mortgage interest, homeowners association (HOA) fees and depreciation. For example, if your condo is valued at $100,000, divide that amount by 27.5 years to get an annual allowable depreciation figure of $3,636.36. Add the depreciation figure to your other expenses, and subtract the total from the income that you receive from the condo to arrive at your profit or loss that you report to the IRS.

Special Assessments

Condominium homeowners associations have the ability to make special assessments for major improvements, such as repaving a parking lot or replacing a roof. Each condo-unit owner is responsible for paying the assessment in addition to paying the monthly HOA fee. Special assessments are not allowed as an expense on your taxes. The IRS provides the depreciation tax break to give investment condo owners the ability to recover the cost of such improvements over time.

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