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Analysis of Economic Depreciation for Multi-Family Property

Author

Listed:
  • 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.

Suggested Citation

  • Jeffrey D. Fisher & Brent C Smith & Jerrold J. Stern & R. Brian Webb, 2005. "Analysis of Economic Depreciation for Multi-Family Property," Journal of Real Estate Research, American Real Estate Society, vol. 27(4), pages 355-370.
  • Handle: RePEc:jre:issued:v:27:n:4:2005:p:355-370
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    References listed on IDEAS

    as
    1. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-199, May.
    2. Dean H. Gatzlaff & Richard K. Green & David C. Ling, 1998. "Cross-Tenure Differences in Home Maintenance and Appreciation," Land Economics, University of Wisconsin Press, vol. 74(3), pages 328-342.
    3. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604-604.
    4. Stephen Malpezzi & Larry Ozanne & Thomas G. Thibodeau, 1987. "Microeconomic Estimates of Housing Depreciation," Land Economics, University of Wisconsin Press, vol. 63(4), pages 372-385.
    5. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
    6. Brent C Smith, 2004. "Economic Depreciation of Residential Real Estate: Microlevel Space and Time Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 161-180, March.
    7. Clapp, John M. & Giaccotto, Carmelo, 1998. "Residential Hedonic Models: A Rational Expectations Approach to Age Effects," Journal of Urban Economics, Elsevier, vol. 44(3), pages 415-437, November.
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    Citations

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    Cited by:

    1. Frank Packer & Timothy Riddiough, 2012. "Securitisation and the Commercial Property Cycle," RBA Annual Conference Volume,in: Alexandra Heath & Frank Packer & Callan Windsor (ed.), Property Markets and Financial Stability Reserve Bank of Australia.
    2. Danny Ben-Shahar & Yoram Margalioth & Eyal Sulganik, 2009. "The Straight-Line Depreciation is Wanted, Dead or Alive," Journal of Real Estate Research, American Real Estate Society, vol. 31(3), pages 351-370.
    3. Iqbal A. Syed & Jan De Haan, 2017. "Age, Time, Vintage, And Price Indexes: Measuring The Depreciation Pattern Of Houses," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 580-600, January.
    4. Yoshida, Jiro, 2016. "Structure Depreciation and the Production of Real Estate Services," HIT-REFINED Working Paper Series 44, Institute of Economic Research, Hitotsubashi University.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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