Depreciation is the term used to describe the decline in an asset’s value over a period of years. In other words, depreciation is the process by which assets lose value as a result of aging and obsolescence. Depreciation will continue until the assets’ useful lives are over. There are several methods to calculate depreciation in Excel. What if you have a rental property, and you have to calculate the depreciation of your property? In the world of real estate, rental property depreciation is a fundamental accounting concept that effectively enables you to spread out the expense of a significant asset with a useful life of at least one year. In this article, we are going to show the steps to create a rental property depreciation calculator in Excel. Let’s get started.
What Is Rental Property Depreciation?
Property owners can use depreciation as a tax credit each year until the asset’s value is entirely diminished. In real estate, the land beneath buildings and other physical structures is not depreciable. This indicates that there is no tax deduction for depreciating land value. The useful life of the item, as defined by the tax code in your region, determines the depreciation deduction amount each year. A property’s functional life duration is distinct from its physical life span. The average useful life of a residential property in the USA is about 27.5 years. So, the formula for depreciation is like this:
How to Make a Rental Property Depreciation Calculator in Excel: 3 Quick Steps
We have created a rental property depreciation dataset to estimate the depreciation and the taxable asset value over a span of time. We have calculated the amount of the assets’ rental value for 10 years. But we extended the depreciation period by 27.5 years. So, you will get the Year-end Taxable Rental Value at the end of 10 years.
Not to mention, we have used the Microsoft 365 version. You may use any other version at your convenience.
Step 1: Create an Outline
- In the very first step, we have to create the outline of the dataset. The dataset will contain the Asset Value, the Land Value, and the Asset Basis attributes. We also put the Time Period for which we want to calculate the Depreciation.
- Next, enter Year, Depreciation Per Year, Accumulate Depreciation, and Year End Taxable Rental Value fields in Row 11. Here we take it for 10 years.
Step 2: Input the Entities
- At this step, we input our entities as an Asset Value of $50000. But the Land Value is subtracted from the Asset Value to find the Asset Basis which is depreciable. The Time Period is 27.5 years as the standard of the U.S.A.
Read More: Create Depreciation Schedule in Excel
Step 3: Calculate the Depreciation
- To calculate the Annual Depreciation go to cell C9 and insert the formula
This formula calculates the Annual Depreciation of assets over a period of 27.5 years.
- At this moment, we need to insert the Year-wise Depreciation in cell C12.
- Then, drag down the value for other cells also. You will get the following result.
- At this moment, we estimate the Accumulated Depreciation. It is calculated by adding the Year-Wise Depreciation. In the cell, D13 writes up the formula.
It adds the value of cell C12, the Depreciation Per Year value, to the D12 cell value.
- Consequently, drag down the Fill Handle tool for the other cells.
Finally, you get the result for the Accumulated Depreciation.
- This time, we calculate the Year End Taxable Rental Value. To do this operation, insert the value in the E12 cell.
In cell $C$6, we subtract the Accumulated Depreciation from the Asset Basis.
Note: If you want to use a cell as an absolute reference, just press the F4 key while selecting the cell.
Eventually, you will get the result after pressing ENTER and dragging it down for the other cells.
We have provided a practice section. This can be used as a Rental Property Depreciation Calculator.
Download the following practice workbook. It will help you to realize the topic more clearly.
That’s all about today’s session. These are some easy steps to create a rental property calculator in Excel. Please let us know in the comments section if you have any questions or suggestions. For a better understanding, please download the practice sheet. Thanks for your patience in reading this article.