What does depreciation of property mean?

A decline in the selling price of an immovable asset is known as depreciation.

Over time, every valuable asset undergoes a decline in worth. Real estate, despite being a popular investment, is no exception. Factors like weather conditions, inadequate maintenance, delayed infrastructure projects and a lack of nearby facilities can contribute to the depreciation of a property’s value. When planning to resell your home, it is crucial to consider these elements as they can significantly impact the resale value. Calculating property depreciation is essential for setting a realistic price and closing the deal. This guide provides insights into property depreciation, calculation methods and contributing factors.

 

What is depreciation of property?

A decline in the selling price of an immovable asset signifies depreciation. Land, known for its enduring value, remains useful for centuries. However, when evaluating property depreciation, the focus is on the structure built on the land. Houses or buildings depreciate based on their remaining useful age, while the land retains its value over the years.

 

How to calculate depreciation of property?

The average lifespan of an independent house is around 60 years. To calculate property depreciation, two factors are essential – the total useful age of the structure and the number of years after construction. The formula for property depreciation is the number of years after construction divided by the total useful age. Subtracting the result from the selling price provides the current building price. However, this is not the total property value as land value must be considered.

For example, an individual plans to sell a 10-year-old property with the following details:

  • Construction cost: Rs 20 lakh
  • Land value at purchase: Rs 30 lakh
  • Appreciated land value: Rs 45 lakh
  • Number of years after construction: 10 years
  • Total useful age: 60 years

Using the formula (10/60), the depreciated value is 1/6. Subtract this depreciation from the construction cost and add the appreciated land value to determine the market value.

Depreciated building price = Rs 20,00,000/6 = Rs 3.33 lakh

Rs 20 lakh – Rs 3.33 lakh

= Rs 16.66 lakh

Rs 16.66 lakh + Rs 45 lakh = Rs 61.67 lakh (final market value)

 

What is depreciable property?

Depreciable property refers to any asset that undergoes depreciation due to regular wear and tear, damage or ageing. Typically utilised for business purposes, depreciation rates are defined by the income tax department. Residential buildings have an annual depreciation rate of 5%, while commercial properties have a rate of 10%. For instance, if you own a shop, valued at Rs 50 lakh, you can deduct Rs 5 lakh from your taxable income, reducing the tax burden and enabling significant annual tax savings. Some examples of depreciable property include:

  • Vehicles
  • Machines
  • Buildings rented out for income
  • Heavy equipment
  • Office buildings
  • Office equipment
  • Patents
  • Computer software
  • Electronics
  • Copyrights

 

What are building depreciation rates?

The income tax department allows taxpayers to claim deductions based on the reduction in the value of tangible assets, like property, and intangible assets, such as patents. Annually, the tax department announces depreciation rates. Since AY 2018-19, building depreciation rates have remained unchanged. Buildings may vary in type, including commercial, residential or industrial. The rate of depreciation for residential premises is 5% and 10% for other buildings. Furniture, electrical fittings and fixtures in a building have a depreciation rate of 10% and temporary wooden structures have a depreciation value of 40%.

 

Latest building and land depreciation rates

The Companies Act, 2013, as outlined in Schedule 2, furnishes information about the applicable lifespan of tangible assets. Depreciation for assets is calculated using the straight-line depreciation (SLM) and written-down value (WDV) methods. The table details the useful life and depreciation rates for buildings as specified in the Companies Act, 2013:

Types of asset Useful life (in years) Depreciation rate
WDV rate SLM rate
Factory buildings 30 9.50% 3.17%  
Wells, tube wells, fences 5 45.07% 19%  
Buildings (except factory buildings) with RCC frame structure 60 4.87% 1.67%  
Buildings (except factory buildings) without RCC frame structure 30 9.50% 3.17%  
Others (including temporary structures and more) 3 63.16% 31.67%  

 

Factors contributing to the depreciation of property

  • Physical obsolescence: Built structures deteriorate over time. A recently constructed house requires less maintenance, while an older structure may need more upkeep due to the impact of weather conditions. Proper maintenance plays a crucial role in minimising depreciation. Poorly maintained properties may experience 40% more depreciation compared to well-maintained ones.
  • Location and infrastructure: The depreciation rate varies based on the property’s Properties in upscale areas experience slower depreciation than those in less sophisticated areas. Moreover, incomplete or long-delayed infrastructure projects can negatively impact the resale value. For instance, connectivity projects that are stalled or shelved may lead to significant depreciation. The presence of slum tenements or a cremation ground nearby can adversely affect property prices. Properties in underdeveloped areas may witness around 60% more depreciation than similar properties in upscale localities.
  • Legal tussles: Properties involved in legal disputes may experience higher depreciation as buyers prefer properties free from legal complications. However, some individuals may be willing to deal with legal issues to purchase a property at a lower price. Disputed properties are available at a reduced cost as sellers are primarily concerned with selling the property to make a profit.

 

FAQs

What is the depreciation of immovable property?

Depreciation of immovable property refers to the gradual reduction in the property’s value until it becomes obsolete. Investors use depreciating properties to seek tax deductions.

Is land a depreciable property?

No, land is not a depreciable property as it is considered to last forever and lacks a useful life.

What is the depreciation rate for a building?

Commercial buildings face a 10% depreciation rate, while residential buildings have a 5% depreciation rate.

Is the property a depreciating asset?

Yes, a built structure is a depreciating asset, while land is an appreciating asset.

Can rental property depreciate and charge a lesser rental value?

Yes, if a rental property shows signs of poor maintenance and lacks amenities, the rental value may depreciate over time.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]

 

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