How to calculate asset depreciation?
Here I will keep it simple. The asset depreciation example is for a property bought for $100,000 fifteen years ago. Assume $20,000 for land and $80,000 for improvements (house and garage). Now, you decide to convert this property to a rental. Your depreciation will be based on the $80,000 base value of improvement. The point here is the depreciation is always calculated based on your purchase price. Using the straight-line method and 27.5 years recovery period, we may deduct about $80,000 / 27.5 years = $2910 per year. Each year, for 27.5 years only, the $2910 depreciation is reported as an legitimate expense even though you do not have to spend the money claimed.
