A property's depreciation value becomes a thing of great importance when the owner of the said property is contemplating its sale. It is inevitable that no matter how much you may have paid to buy your home or to construct and design your home - its present value is always determined by its age, the wear and tears the house has sustained and the value of its location - while also factoring the initial cost.

The percentage of depreciation allows both investors and sellers to evaluate the cost of the asset realistically - giving them a fair idea of how much they may purchase or sell the property for. Real estate investments have always been touted as one of the most lucrative, safe and risk-averse investments in the market, which also makes allowances for tax benefits. Real estate investments present investors with the opportunity to reduce tax liabilities through the medium of mortgage payments and depreciation deductions.

In this article, we attempt to understand what property depreciation is, what are the factors that impact the rate of depreciation - what can withstand depreciation and how to calculate the rate of depreciation.

WHAT IS PROPERTY DEPRECIATION?

As the dictionary term suggests, depreciation in this context too means the opposite of appreciation. Property depreciation means the dip of decline in the value of your real estate asset. Usually, such a decline is permanent in nature, and once deducted - the value cannot be hiked up again, barring exceptional cases. But before we jump into the details, it is important to register two important differentiations:

• The physical house is an asset that typically tends to depreciate
• The location typically witnesses an appreciation in its rates

What this basically means that if you live in a flat, in an apartment complex on Altamount road, the flat unit is very likely to experience depreciation in its value, owing to the age of the house as its longevity and residual life decreases with each passing year, but that doesn't mean that the land on which the house is constructed loses its value too. Let's keep this aside before we can come back to this again.

There are several factors that can compound the depreciating value of a property asset. When a house/commercial property is occupied, it sustains the brunt of the residents' movements - the wear and tear of human life. This directly impacts the structural integrity of the house, shaving off years from the house's lifetime, ageing it considerably. Here are some factors that affect the property value, contributing to its depreciation:

• Regular wear and tear
• Accidental damage
• Destruction of Property
• Obsolescence
• Age of the Property

Circling back to the point raised before, the depreciation is calculated only against the value of permanent property, constructed on the land - including building structures, bungalows, and shop units. What withstands the brunt of time, is the land which it is constructed upon. The land on which the asset is built, typically only measures up in price, over the years - keeping its value intact and climbing, according to its market value.

It is important to note that when one buys a house, they also own the plot of land it is constructed upon. For eg, if you have constructed a bungalow on Altamount Road, this effectively means that you also legally own the Floor Space Index (FSI) of the land on which the house is built - hereby owning a small parcel of the land, whose value has been constantly appreciating. This often accounts for a heightened resale value - the new value both accounting for the decreased book value of the property and the increased market value of the land. It is not necessary that resale property will always sell at a higher price - that notwithstanding, the resale price always has both values built into the cost.

WHY IS CALCULATING DEPRECIATION IMPORTANT?

Property depreciation plays a big role in the income tax computation, coming under Section 32 of the Income Tax Act of 1961. By norm, if an asset (both tangible and intangible) has been used for over 180 days, a deduction of up to 50% can be claimed under the IT act.

Calculating the depreciated value helps in providing tax relief to both the owners of the property and the potential investors - by factoring in the correct and current valuation of the property. Corporate real estate investors too are required to do the same, to seek corresponding tax relief, based on the correct assessment of their property value.

The second use of knowing the depreciated value of the property is to be able to gauge the correct resale value of a property - allowing the seller to quote a fair price to the investor.

WAYS TO CALCULATE THE DEPRECIATING VALUE OF PROPERTY

There are several formulas that can be used to accurately calculate the depreciated value of a property asset - the Straight Line Method and the Written Down Value Method. To calculate the selling price of the property is simple enough - given that all the variables are known to the owner of the property.

On average, the life of an independent house scales up to nearly 60 years - bearing in mind all the regular wear and tears. Keeping that in mind, imagine this :

You live in a house, that you now want to sell after 20 years of construction. Assuming that the longevity of the house will span up to 60 years, this is how the formula will flow - The number of years of construction/ Total useful age of the building, which in this case is 20/60.

20/60 or ⅓ is the remaining useful age of the building, which means that while estimating the resale value of the property, you as sellers should consider a 1/3rd deduction from the price of the building.

So the resale value of the building would be the market value of the land and the house, multiplied by ⅓.

It is important to note that many prefer the Written Down Value Method as it helps calculate the tax exemptions with more ease.

EXCEPTIONS TO DEPRECIATION

As is the case with almost everything, the depreciation that occurs to the value of the property does have some exceptions, which makes the value of the property immune to the effects of time, despite the wear and tear the house endures. In such cases, the seller of the property stands the chance to ask for whatever price they see fit, not taking into account the depreciation of the property because of the demand they face. Here are a couple of reasons that could eliminate the possibility of a depreciated resale value.

• A Competitive Demand For Land: The seller of the house has the leverage in the transaction if the demand for the locality stands unrivalled by other options - giving them the upper hand in quoting the price. This often occurs in premium localities, in posh parts of any city where new constructions have ceased and the availability of new land is now scarce. In such cases, the depreciated value is consequential, because of what the investor is willing to pay for the property.
• Novelty Value of the Property: In special cases, the investor wants the property at any cost, their demand stemming from a sentimental value. In such cases, again, the cost or demand is no factor, and the seller of the property enjoys the privilege of quoting a price as they see fit. This often happens in the cases of buying back ancestral property, or properties that hold significant meaning to the investor.