Property Depreciation and Appreciation – A Landlord’s Guide

Key Takeaways

• Understanding appreciation and depreciation helps Coastal Virginia landlords make informed financial decisions.
• Strategic maintenance, thoughtful upgrades, and accurate recordkeeping enhance value and optimize tax benefits.
• Partnering with a Coastal Virginia-based property management company simplifies compliance, preserves investments, and supports long-term success.

---

A rental or investment property is a long-term investment. After all, it offers steady passive income while also building wealth over time. One of the biggest advantages of owning real estate is appreciation, the natural increase in a property’s value. 

Appreciation allows investors to sell at a higher price than they purchased, build equity, and even leverage that equity for future opportunities. It’s one of the primary ways landlords maximize returns beyond monthly rental income.

At the same time, it’s important to keep depreciation in mind. Just as real estate can appreciate, it can also lose value over time due to wear and tear, limited upkeep, or shifting market conditions. 

Understanding both appreciation and depreciation gives a clearer picture of a property’s real financial performance. In this guide, the team at Limehouse Property Management walks through everything you need to know so you can make informed decisions and protect the long-term profitability of your rental.

How Is the Value of a Property Calculated?

Properties are tangible investments with an inherent value. That value is shaped by a mix of factors—market conditions, location, and the property’s own characteristics. 

 

 

Appraisers, investors, and real estate professionals generally rely on a few main methods: comparable sales (looking at recent sales of similar homes), income potential (especially for rentals), and replacement cost (what it would take to rebuild or buy a similar property).

Some of the key factors that influence property value include:

• Location. Proximity to schools, jobs, shopping, and transportation boosts value.
• Market demand. High buyer or renter demand typically pushes values upward.
• Size and layout. Larger or more functional properties tend to hold higher value.
• Condition and maintenance. A well-maintained property appreciates significantly, while neglect can chip away at value.
• Neighborhood trends. Revitalization or decline in the surrounding area directly impacts value.
• Economic climate. Interest rates, employment rates, and the broader economy all play a role in demand and property value.
• Amenities and upgrades. Modern features, efficiency upgrades, and renovations increase appeal.

What Landlords Need to Know About Appreciation and Depreciation

What Is Appreciation?

Appreciation refers to the steady increase in property value over time. This can be driven by higher demand, home improvements, neighborhood changes, or wider economic trends.

What Is Depreciation?

Contrary to appreciation, depreciation refers to the decline in a property’s value over time. Depreciation usually occurs due to one or multiple factors, including the following: 

• Neglect or deterioration. While some wear and tear is expected, visible issues such as damaged roofs, plumbing problems, peeling paint, or outdated appliances can reduce a property’s value and appeal.
• Functional obsolescence. When a property’s design or features no longer align with modern standards—such as lacking open floor plans or energy-efficient systems—its value may decline.
• Location conditions. Factors like rising crime rates, frequent turnover, or even negative word-of-mouth about a neighborhood or city can lower property values.
• Economic factors. High interest rates, low employment, and other economic pressures can affect demand and, in turn, property values.

How to Calculate Depreciation

Depreciation can present challenges for landlords, as a lower property value may affect rental rates and overall returns. The good news is that landlords can deduct property depreciation, reducing taxable income and potentially boosting their bottom line. 

Here’s a step-by-step guide to calculating depreciation:

1. Work Out the Property’s Current Value

To calculate depreciation, you first need to determine the adjusted cost basis of the property:

• Purchase value. This includes the purchase price as well as expenses incurred at the time, such as legal fees, closing costs, and mortgage interest. The cost of land is not included.
• Improvements. Add the total cost of improvements made, such as landscaping, repairs, new appliances, or renovations.

For example, if you paid $1.5 million for your property—including closing costs, property taxes, and agent fees—invested $100,000 in renovations, and the land is valued at $500,000, your cost basis would be $1,100,000.

2. Calculate the Annual Depreciation

Depreciation of residential properties is typically calculated using the General Depreciation System (GDS). Under this system, residential properties have a recovery period of 27.5 years. 

Depreciation is found by dividing the property’s adjusted cost basis by the recovery period. In the example above, if the cost basis is $1,100,000, dividing by 27.5 gives $40,000 in annual depreciation.

3. Deduct the Annual Depreciation

Once you’ve calculated annual depreciation, you can use it strategically to maximize returns. Depreciation is an accepted tax deduction, allowing you to offset expenses, protect cash flow, and reinvest savings into upgrades or new properties. 

Final Thoughts

Understanding depreciation is key for landlords because it affects taxes, cash flow, and long-term profitability. By knowing how to calculate and apply it, you can lower taxable income, strengthen returns, and make more informed financial decisions. 

Paying attention to the factors that influence property values also helps you build strategies to increase both value and appeal.

Want to learn more about depreciation and property value? Contact Limehouse Property Management today!