We all know the Denver market has been creating significant equity for property owners the past few years. While we have said time and time again that we are not in a “bubble” there are still plenty of skeptics out there. The reality is that for us to see a more level market we would need upwards of 25,000+ homes to hit the market. However, with the Feds raising interest rates the market does shift a bit because rates are directly correlated with purchasing power. As the rates go up your purchasing power goes down. What does this have to do with this weeks Real Vocabulary? Well, we are going to chat about the other side of equity…depreciation. While there are awesome tax benefits from property depreciation, let's get real: you’ve lost money/equity on your property.
The IRS defines depreciation as: an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property. -www.irs.gov-
Now let's dive deeper into the concept and how it affects you on the lending side. We asked Abby McDaniels with AmerifFirst Financial to give us some insight into how a lender looks at depreciation.
“Let’s talk about the Big D and I don’t mean Denver, but Depreciation."
First the definition - a reduction in the value of an asset with the passage of time. A few ways this impacts our market and the home buying process:
#1 - Housing markets can/do and will go through what’s called mean reversion. Mean reversion in theory states that prices/assets will eventually or at some point return to the average price or return. With that being said, “your home will only continue to appreciate in value”, may not always be the case. Buyer beware, although the home buying and investing side of the housing market can be extremely advantageous. Buyers, be intentional about your home buying decisions, you may want to look at long-term averages in your local market with depreciation and appreciation before taking the home purchasing leap!
#2 – Depreciation is also used when calculating income for qualifying for a mortgage. Specifically for this purpose we will use the example of rental income. When Schedule E income is used to calculate qualifying rental income (for all of you investors out there and future investors) the lender MUST add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow! Yay that’s a WIN!
Disclosure – please contact your accountant, they are the experts in how to file depreciation on your taxes.
All in all – don’t let the Big D scare you. Educate yourself in your market, due your diligence and use your local real estate resources to help make all the right decisions in avoiding Depreciation in your next home purchase. Mic drop!” #whoneedsamortgage
We’re aware that this is a lot of information to swallow. The good news is that we are here to help in any capacity that we can.
Please don’t hesitate to reach out with uncertainty, questions or concerns:
Krystal Thompson, Realtor with West + Main Homes firstname.lastname@example.org
Abby McDaniel - NMLS 1165325 | Sr. Mortgage Loan Officer | AmeriFirst Financial, Inc. - NMLS 145368 | 2460 W. 26th Ave., Ste. 390-C, Denver, CO | Phone: 720.616.6479 | Email: email@example.com