5 Factors that Determine Property Depreciation

Posted by Candice Larson on July 4th, 2018

Depreciation is something that will help your bottom line come tax time. Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.

However, property depreciation happens when an owner does not take care of their property, or the environment around their property changes. This can be avoided by maintenance, of course, but also by keeping an eye on local happenings, and anything that might affect your investment. Depreciation can arise from a variety of factors such as wear and tear, obsolescence and economic factors like demand for the asset. Depreciation can be both advantageous and disadvantageous.

Below are the determining factors for property depreciation:

Home improvements

Any upgrades on the property helps to determine the value of it. If you add a hot tub, extra bedroom, kitchen improvements, a hardwood floor, new windows, anything that adds to the utility or aesthetic attributes of a property will cause it to appreciate in value. But location is often the major factor in property appreciation. If you are lucky enough to invest wisely in some beach front property, it is almost guaranteed you will see a return on your investment.

Location

Having ready access to hospitals, restaurants and cultural attractions, entertainment, good schools, transportation, shopping malls, the business district and airports, is a major concern for potential buyers and an important factor to consider before investing in property. A small percentage of buyers might be looking to get away from all these things but most will be looking for convenience.

Age of the property

One obvious possible factor is that buildings may be of different ages. Older buildings might be more susceptible to deterioration than newer ones, or more vulnerable to obsolescence ‘shocks’ in terms of changes in technology, user requirements or building regulations.

Nearby foreclosures

A residential property in serious delinquency or foreclosed on by a bank can bring neighboring residential properties down by as much as one percent in value. Moreover, a high concentration of foreclosures in a neighborhood can repel buyers, especially if the properties are not maintained well, are vacant for too long, or are perceived as contributing to a rise in neighborhood blight.

Location value

A house located closer to schools, grocery stores, public transportation and business or shopping districts will tend to be in greater demand than houses located too far out of the way. On the other hand, houses that are too close to loud areas such as busy highways, airports or train stations can be a turn-off for people in the market to rent or buy. While most houses are not moved from where they sit, the value of the location can still fluctuate. A one percent decline in a city’s population can bring down house prices in that city by more than four percent over a three-year period. A decline in employment in the city can also dramatically reduce home values.