Congress has had a habit of tinkering with real estate depreciation schedules, and it may soon reexamine whether they match reality. A new study by Deloitte & Touche argues that the rate of real estate depreciation allowed under current tax law is too slow. The study concludes that the 39-year non-residential and 27.5-year residential schedules should be reduced to 20 years. The Real Estate Roundtable, a Washington, D.C.-based organization, commissioned the study to provide new data that could be used to demonstrate to Congress that current tax depreciation schedules are outdated.
"The tax system is supposed to reflect the actual economics of loss in value, but it does not provide depreciation quickly enough to match the actual loss in the value of buildings," says Randall Weiss, director of tax economics for Deloitte & Touche in Washington, D.C., and the lead author of the study. While the changes would lower taxes on any existing real estate investment, Weiss speculates that faster depreciation would also provide more incentive to invest in real estate.
Depreciation for an office building at 39 years "is simply much slower than the real economic rate of depreciation for that asset," says Stephen Renna, the Roundtable's vice president and counsel. "If you didn't make ordinary capital improvements to a building, it would have an economically useful life of 2025 years."
According to Weiss, previous research understated the rate of economic depreciation and overstated the appropriate recovery periods because it neglected to account for the substantial expenditures for building improvements after original construction.