mortgage updates
Posted on July 23, 2009
Filed Under City Mortgage
Mortgage Interest: new landlords often think they can expense all of their debt service, which is your mortgage payments plus any other money paid toward retiring the loan. But you can’t expense the money that goes toward principal because it’s not really an expense. For example, suppose you make a $1,000 mortgage payment, $200 of which goes to principal and the rest to interest. By doing so, you spend $1,000 from your checking account, while increasing your equity in the property by $200. The correct transaction will be a $1,000 credit to the checking account, an $800 debit to the Mortgage expense and a $200 debit to the Building Equity Asset account. Your rental property program should calculate this automatically.
• Depreciation: this expense relates to the natural deterioration that happens to almost any long-lasting asset. Most landlords think of depreciation in terms of buildings. For example, most residential buildings have a depreciation period of 27 1/2 years. This means that you can take 1/27.5 (3.63636… percent) of the building’s value as an expense each year; until you’ve owned it for 27.5 years or sell it, whichever comes first. How are you going to determine the building’s value? Multiply the purchase price by this ratio: building assessment / overall assessment. You can usually get the assessments from the town or county.
It makes a lot of sense to depreciate items in a building separately from the building itself, because such items usually have shorter recovery periods (meaning you can take more of the value – as much as 20 or even 33 percent – each year until the end of the period).
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