If it's the first year you've placed the asset into service,

then the depreciation rate is at the intersection of column eight

and row 1 or 1.364%.

You would multiply 1.364% by the basis in

the apartment building to figure out the depreciation deduction for year 1.

For year 2, you just drop down 1 row and

look at the intersection of column 8 and row 2.

Here, the rate is 3.636%.

You would multiply 3.636% by the basis in

the apartment building to figure out the depreciation deduction for year 2.

Because real estate is depreciated straight line that is spread evenly over time,

the depreciation rates between the first and last years are roughly the same.

So, if you stay in column 8 and look at the percentages in row 2 to 18,

row 19 to 27, and row 28,

they're all basically the same,

either 3.636% or 3.637%.

The rates are slightly different to accommodate rounding.

But this is the idea of straight line,

that the depreciation rate is the same over time.

The bottom table shows the depreciation rates for non-residential real property.

Same idea here.

If you're a landlord or a business owner,

and you place into service an office building or a warehouse that is

non-residential real property on August 4th of the current year,

then you look at the bottom panel because this is the non-residential real estate panel,

and you look in column 8 because August is the eighth month of the year.

If it's the first year you place the asset into service,

then the depreciation rate is at the intersection of column

8 and row 1 or 0.963%.

You would multiply 0.963% by the basis in the apartment building

to figure out the depreciation deduction for year 1.

For year 2, you just drop down

1 row and look at the intersection of column 8 and row 2.

Here, the rate is 2.564%.

You would multiply 2.564% by the basis in

the apartment building to figure out the depreciation deduction for year 2,

and because real estate is depreciated straight line that is spread evenly over time,

the depreciation rates between the first and the last years are the same.

So, if you stay in column 8 and look at the percentages in row 2 to 39,

they're all the same, at 2.564%.

Again, the tables are split into months because

real property is depreciated using the mid-month convention.

So, the assumption is that regardless of

when during the month you place the asset into service,

or when during the month you dispose of the asset,

you are allowed half a month's worth of depreciation.

So, in our example, if you placed realty into service on August 4th,

it's assumed that you placed the realty into service on August 15th.

Same goes for if you placed the asset into service on August 10th,

or August 20th, or August 30th,

it's assumed that you placed the asset into service on August 15th,

that is in the middle of the month.

So, let's work through an example using the realty tables and the mid-month convention.

On July 12, year 20x1,

Blue Company purchases and places into service

a warehouse and the land it resides on for $170,000,

where $120,000 is allocated to the building.

What is the amount of depreciation on the property in year 20x1,

and what about in year 20x2?

First, we need to figure out whether the warehouse is residential or non-residential.

Well, warehouses by definition do not include dwelling units.

Warehouses are used for business storage,

inventory, and logistics management.

So, we can consider the warehouse to be non-residential.

Therefore, we look at the non-residential depreciation rate table, and here it is.

Now, in order to find the right depreciation rate,

we need to identify the correct column and row.

The columns correspond to the months.

The warehouse, in our case,

was placed into service on July 12.

July is the seventh month,

so we will look at column seven.

Year 20x1 is the first recovery year,

so the correct year is 1.

The intersection of column 7 and row 1 will give us

the depreciation rate of 1.177%.

So, now that we have this 1.177 percent rate,

what do we multiply it by?

Do we multiply it by the $170,000 value which includes both the warehouse and the land,

or do we multiply it by just the value of the warehouse,

that is the $120,000?

Well, we're only allowed to depreciate buildings, not the land.

So, the basis we use for the calculation is $120,000.

We take the $120,000 basis of only the building and multiply

it by 1.177% to get $1,412.

Therefore, in year 20x1,

the first year of use,

the warehouse will generate a depreciation deduction of $1,412.

Now, what about the next year?

What is the depreciation deduction in year 20x2?

Well, we go back to the non-residential realty depreciation table,

and we stay in column 7 because July was

the original month the warehouse was placed into service.

But we are now in year 2,

so we simply drop down1 row and stay in column seven.

So here the rate is 2.564%.

Now that we have this 2.564% rate,

we need to multiply it by the 120,000 original basis.

Therefore, once we multiply out the $120,000 basis times the

2.564% depreciation rate, we get $3,077.

Therefore, in your 20x2,

the second year of use,

the warehouse will generate a depreciation deduction of $3,077.

In all, remember that with business use realty,

we need to differentiate between residential and non-residential realty.

Depreciation only applies to buildings, not the land,

and the IRS requires taxpayers to use the mid-month convention,

which uses straight-line depreciation.

Once you identify the correct depreciation rate from the IRS tables,

simply multiply it by the original basis of

the realty value to obtain the depreciation deduction for the year,

and that's how we depreciate business use realty.