How to Calculate Depreciation of Building?

If you have studied commerce or have knowledge about the basic concepts like appreciation and depreciation of prices, then it will be much easier for you to understand how to calculate depreciation of building. But is there any such concept in the first place? Well yes, just like any other asset, the building grows older and starts depreciating. It’s value decreases over the period of time and hence the calculations are made accordingly. Let me cover up how to calculate depreciation of house in this answer for you in detail with an example.

Let me cover the important things first, while the price value of a building depreciates over a period of time, the prices of land mostly see an increase in value. However, there are many factors that contribute to the price appreciation and depreciation. These factors majorly are:

• Geography

• Wear and tear

• New technology

• Market conditions

Coming back to your query how to calculate depreciation of building. In India, the depreciation rates are determined by the law under Companies Act 1956 and Income Tax Act. 

• Find the market value of the property

• Make an estimate of the useful life of the building. Usually, it is 60 years for a building.

•  Exact number of years of construction

The formula to calculate depreciation on building is:

(Number of years after construction / Total useful age of the building) x current market price

Let us assume Akshay bought an independent house in 1990 and decides to sell the property after 30 years. He will arrive at the selling price by using the above formula.

(Number of years after construction / Total useful age of the building) x current market price

(30/60) x current market price

I.e., ½ x current market price

There are 3 brackets to calculate the the depreciation rate according to the ITA, these are:

• For residential premises:

  5% depreciation rate

• For buildings:

  10% depreciation rate

• For buildings for water treatment facilities:

  100% depreciation rate

• For wooden construction:

  100% depreciation rate

I hope this answer suffices for your question about how to calculate depreciation on buildings now.

As my building was getting older, I wanted to know about its depreciation value. I started to search online to learn how to calculate the depreciation of a building. While doing that, I came across the WDV (Written down value) method, which involves multiplying the WDV at the beginning of the year by the Depreciation rate. If you want to know about this method in detail, you can check the answer provided by Purvi. 

How to Calculate Depreciation Value of Building?

Apart from the WDV method, I also learned about a few other methods. I have mentioned those below. 

Declining Balance Method

To calculate the depreciation rate of a building with this method, you can use the below formula. 

Total yearly depreciation =

Depreciation factor x (1 /Lifespan of asset) x Remaining value

Unit of Production Method

This is another method that I had learned about. To calculate the depreciation value of a building using this method, you can use the below formula. 

DE = [(Original Value - Salvage Value) / Estimated Production Capability] x U

Here, 

• DE = Depreciation Expense

• U = Units per year

And that’s all I have learned about calculating the depreciation value of a building. I hope this helps. 

W

orrying how do you calculate depreciation on a building? You can go through the below-mentioned 2 methods to assist you regarding the same.

How to Calculate Building Depreciation Value?

• Straight-Line Method

  : 

Depreciation using the straight-line method is calculated by dividing the cost of the building (excluding the cost of land) by the estimated useful life of the building.

Depreciation per year = (Cost of building - Residual value) / Useful life

Where:

Cost of building: The original cost of construction, including any additional costs incurred to bring the building to its present condition, but excluding the cost of land.

Residual value: The estimated salvage or scrap value of the building at the end of its useful life.

Useful life: The estimated period over which the building is expected to be used.

• Written Down Value (WDV) Method

  : 

Depreciation using the WDV method is calculated as a percentage of the written-down value of the building at the beginning of the year.

Depreciation per year = WDV at the beginning of the year × Depreciation rate

Where:

WDV at the beginning of the year: The cost of the building minus accumulated depreciation up to the beginning of the year.

Depreciation rate: The percentage rate of depreciation allowed by the Income Tax Act. For buildings, it is typically 5% to 10% per year.

These are the two methods for how you calculate depreciation on a building.

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I had the notion that every property gets a good resale value in the future. So if I buy a property worth Rs 40 lakhs, it is bound to increase in the future but this is not always the case. I recently saw a property get sold at a very cheap price and that is when I learnt about the residential building depreciation rate which is 5%. The rate or value of a property can decrease as well since it gets damaged, worn down, weak or due to market trends, demands and more with time. It is a broad topic, to be honest, but let me share what I have learnt up till now in brief here.

Which ACT has determined the building depreciation life?

The depreciation rates in India are determined by the Companies Act 1956 and Income Tax Act laws. Generally, it is 60 years for a building.

What is the depreciation of building formula?

You do not require any expert to calculate the depreciation value of a property. You will just need to follow some steps and know the depreciation value of building formula in India yourself. Here is how you can do the calculation

Calculate the price that was required to buy the property along with the tax, repairs, installation or other costs

Calculate the useful life of the property

Calculate next the residual value of the property

Example

To give you an example, let's say that the

Initial cost was Rs 60,000

Residual value is Rs 5,000

And the depreciable cost will be the Initial Cost- Residual Value = Rs (65,000 - 5,000) = Rs 60,000

The Annual depreciation value will be

Depreciable base divided by the useful life of the asset

So if we take the useful life of the property to be for 15 years, the annual depreciation will be

60,000 / 15 = Rs 6,000

Next you need to calculate the rate of annual depreciation

To do it, divide the annual depreciation by the initial cost of the property and then multiply it by 100

So it comes to

6,000 / 50,000 * 100 = 12% per year

The depreciation amount for the 1st year = 12% of Rs 60,000 = Rs 7,200 (note that the depreciation rate for the 1st year will be nil as in the 1st year the property will not depreciate)

Now calculate the written down value of the asset, i.e

Actual value of the asset - depreciation per year=

Rs 60,000 - Rs 7,200 = Rs 52,800

For the second year the depreciation will be

12% of Rs 52,800 = Rs 6,336

So the written down value will become Rs 52,800 - Rs 6,336 = Rs 46,464

For the third year, the annual depreciation will be 12 % of Rs 46,464

 and this will go on.

Use this formula as your building depreciation calculator India and get the value easily.

You can also seek an expert’s help in case you feel confused. 

I hope this answer what is residential building depreciation rate and also how to calculate it.

Hi Friend,

Some days back, my father and I were thinking to calculate the building depreciation rate of our native place. It was during that time we wanted to know the process. However, we are thankful, to Mr. Aakarshit, for his answer. In addition to what Mr. Aakarshit has indicated,

I would like to add a few more elements, which are exceptions to the property depreciation. 

• Emotional connection

We spent our childhood in our ancestral home, which was sold for some reason, and now we want to buy it back, even if the quoted price is greater than the other comparable homes in the region. This is due to our emotional attachment to the asset. As a result, this is regarded as an exception to property depreciation

• Scarcity of land

In metro cities or popular places, property owners may be able to obtain a higher price. This is due to the limited amount of developable land available in such areas. As a result, residential values rise faster than in developing areas with abundant land supply.

Overall, sellers should be aware of property depreciation in order to obtain the best possible price. Overpriced homes have a hard time finding the correct purchasers. Calculating depreciation using the formula above can help you determine the optimum price for your property and find a potential buyer.

Nevertheless, we were able to calculate the rate using the depreciation formula for building mentioned by him in the answer.

I would again like to extend my thanks to Mr. Aakarshit’s answer, which helped us a lot with our query about the building rate of depreciation. 

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