Jeffrey D. Fisher () (Director of the Center for Real Estate Studies Professor of Finance and Real Estate Indiana University) Brent C Smith () (Department of Finance Insurance and Real Estate Virginia Commonwealth University P.O. Box 844000 Richmond, VA 23284-4000) Jerrold J. Stern () (Department of accounting Indiana University) R. Brian Webb () (UBS Realty Investors LLC)
Abstract
This paper uses a hedonic pricing model and National Council of Real Estate Investment Fiduciaries data to estimate economic depreciation for multi-family real estate. The findings indicate that investment grade multi-family housing depreciates approximately 2.7% per year in real terms based on total property value. This implies a depreciation rate for just the building of about 3.25% per year. With 2% inflation, this suggests a nominal depreciation rate of about 5.25% per year. Converted into a straight-line depreciation rate that has the same present value, this suggests a depreciable life of 30.5 years - as compared to 27.5 years allowed under the current tax laws. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade.
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