California Real Estate Practice Exam

If each of the following properties was purchased for $150,000, which would make provision for the most dollars of allowable depreciation?

1. An apartment building

2. A commercial property

3. A farm

4. An industrial property

The correct answer is: An apartment building

The most allowable depreciation typically applies to residential rental properties, which includes an apartment building. In the United States, the Internal Revenue Service (IRS) allows property owners to depreciate residential rental properties over a period of 27.5 years, using the straight-line method. This means the property owner can deduct a portion of the property's value from their taxable income each year for that duration, allowing for a consistent and substantial depreciation benefit. When comparing depreciation allowances for different types of properties, the IRS dictates that the useful life and depreciation methods differ. Commercial properties have longer depreciation periods of 39 years, which means the annual depreciation expense is lower than that of residential rentals. Industrial properties also generally follow the 39-year guideline, like commercial properties. Farms may have varying amounts for depreciable assets, often determined by specific machinery or land improvements rather than the overall value of the property. Thus, when considering the total dollars of allowable depreciation, an apartment building offers more substantial annual deductions due to its shorter depreciation schedule, leading to greater total depreciation write-offs compared to commercial, industrial, or farm properties.