Depreciation of a Building

Think of any good, well kept, apartment house in a prime location or of any good office building in the cen­ter of your city. Practically all of them are worth a great deal more now than they were 25 years ago. One of the factors behind that increase is certainly the prosperity which we have now while 25 years ago we were in a de­pression. But another reason is that in a growing nation prime real estate in a good location will, if well kept, in­crease in value. In fact, it offers a shelter against inflation, since rents will usually increase if all other things become more expensive.

If the trend continues and if you invest in a syndicate which buys choice property, it is entirely possible that while you will be permitted every year to take a depreci­ation allowance, the value of the property will actually increase, in spite of its age. This is of great importance to you and one of the major attractions of investing in real estate. For income tax purposes you may be permitted to take a loss, even though in fact you may not sustain a loss at all and even though your property may have become more valuable.

Comparison Between Depreciation of Lease-hold and Building

Look at the two examples we just discussed and notice the totally different results achieved by depreciation. We chose the example of a lease-hold, because it can be seen so easily that after a number of years nothing of your in­vestment remains at all. In the case of the building the value of your investment may have gone up considerably. It is well possible that the two syndicates might have taken an identical depreciation allowance. In the lease­hold case you would have actually ended up with your investment completely exhausted. In the other case your investment might have been enhanced.

These examples do not imply that lease-holds are nec­essarily an investment of a lesser value than an outright purchase of a building. It could be the other way around. The building could be in a deteriorating neighborhood and lose its value. A lease-hold, especially a long term lease-hold, (say one for 99 years) could be on such favor­able terms, that its value may increase after a number of years. It may be possible, for instance, to raise the rents of the subtenants substantially, while the rent to be paid to the owner of the property might remain the same. Thus the dollar value of lease-hold, if it still has a long period to run, would increase.

All we want to show is that depreciation is not solely a tax "gimmick" but actually may affect the value of your investment over the years.

Next: Depreciation of Specialized Properties and Buildings