What Is Depreciation: The Formula

• For accounting purposes, depreciation is calculated using the formula: (Cost of Asset - Salvage Value)/Useful Life of Asset. For instance, if you purchase a piece of equipment for $110,000 and it has a useful life of 10 years with a scrap value of $10,000, the depreciation each year is ($110,000 - $10,000)/10 or $10,000 every year.
  
  

Determine the Useful Life and Depreciable Basis

• Determine the depreciable base (cost of the asset) and useful life of the real estate.
  For residential property, the IRS provides a useful life guidance of 27.5 years (39 for nonresidential). The depreciable basis is determined by separating the value of the improvements (additions) to the land. New properties will usually have a higher value attributed to the building and vice versa.
  
  

Example: Calculate Depreciation on Residential

• Let's walk through an example. According to the appraiser, the land value for a property worth $200,000 is $110,000. This means the depreciable basis (building value) is $90,000. Apply the formula. Depreciable Basis/Useful Life ($90,000/27.5) is $3272.72.