Whether you are new to the barndominium lifestyle or have been a barndo owner for a long time, it’s important to understand how your home gains or loses value. That way, you can learn how to maintain your barndo and take advantage of benefits as a result of any devaluation.
Naturally, as property goes through wear and tear over time, steel homes barndominiums depreciate in value. But in the actual housing market, homes don’t always depreciate. In fact, they tend to appreciate, hence the depreciation benefit in the form of tax relief.
In this article, we’ll explain depreciation as it’s understood in investment terms. We’ll also explain how to calculate depreciation on a home. At the same time, you’ll get to learn the things that cause a barndominium to depreciate, and how to increase your barndo home value. Let’s begin.
What Does It Mean for a House to Depreciate in Value?
When you hear the word depreciation, you automatically think of the monetary value loss of an asset. Taken at face value, that doesn’t seem like a good thing at all. I mean, who wants their home to lose value anyway?
But house depreciation can actually be a good thing. It can work in your favor and save you money if you use that property for income generation. Typically, for a house, you can use it as:
- A residential rental property, which means renting it out to tenants, or
- A commercial rental property whereby you use parts or the whole house for business.
In this sense, depreciation refers to the deduction of the cost of assets that have a useful life of one year or more, over a long period of time. Depreciation helps you lower your taxable income by annually deducting a calculated portion of the cost of buying and improving a property until you’ve depreciated your entire cost basis or until you sell the property.
Can Your Steel Home Barndominium Be Depreciated?
Though steel home barndominiums have a longer lifespan (as we’ll see later) than houses made of other building materials like wood, they still lose value just like any other asset or property.
For you to take advantage of this depreciation, you can put up your barndo for residential or commercial rental use. From the time you list it as a rental, you can begin taking depreciation deductions. But this isn’t as simple as it sounds. In fact, depreciation can be quite complicated; hence it’s advisable to seek professional help in order to get the best out of it.
But whether you leave the complex work to your tax professional or not, having some basic understanding of depreciation deductions is important for business owners in real estate.
Barndominiums have really grown in popularity over the last few years. You can even find them listed under their own category in Zillow (one of the most popular real estate companies). Though most of the barndos are put up for sale, renting out yours is something you can try out. You just need to be strategic and know how to market the property.
So, what determines whether your barndominium can be depreciated?
What Makes Your Barndo Depreciable?
According to the Internal Revenue Service (IRS), a property has to meet the following requirements for it to be depreciable:
- You must own the property. This means you can’t claim a depreciation deduction if you are subletting a property. And it also means that even when the property is subject to a debt, you are still considered the owner.
- You use the house for your business or to generate an income.
- The property has to have a determinable useful life. In this case, residential real estate has an IRS-determined useful life of 27.5 years, while commercial real estate has 39 years.
- The property is expected to last more than one year.
Something to note is that you can only depreciate the cost of the building and not the land. Land does not depreciate since it cannot be “used up.”
Depreciation of Houses by Property Type
As per IRS regulations, all homes depreciate over time, but the amount of depreciation deduction is not the same for all types of properties. This amount depends on what you are using your home for. Different investments will yield different tax savings in the form of depreciation deduction.
Here are a few examples of house depreciation by property type:
- Residential rental property: If you’re a real estate investor, you probably know the benefits of having a rental property, especially when it comes to tax reliefs and passive incomes from the property. Depreciation deduction can be claimed for a property that’s being used as a residential rental property.
- Personal property: If you use your house as your main residence, then you do not earn any income from it. This type of property cannot be used for depreciation deduction since depreciation, according to the IRS, only applies to income-generating assets.
- Commercial rental property: This is another type of property that can depreciate. You can, therefore, claim depreciation deduction on this asset.
- Home office: This is considered as commercial use of a property. But you will have to determine the square footage of the home that’s used as a home office in order to calculate depreciation deduction.
The Lifespan of Barndominiums
Compared to other building materials like wood and traditional mud, metal frames make some of the most long-lasting buildings.
Barndominiums are metal homes built with a section set aside as the living space, while another part is a barn for livestock or a storage place for a car or other items. These custom homes can either be converted from an actual barn into a living space or built from scratch to serve both purposes.
So what is the lifespan of a metal barndominium? If well taken care of and maintained, a metal home can last up to 50 years. But for it to serve you well all this time, you will need to reduce the wear and tear.
Factors That Can Prolong the Life of Your Barndo
Washing Your Metal Home
You may wonder why you need to wash a metal building since metal combined with oxygen and water results in rust formation.
Well, there’s still a need to wash a metal building because the metal can be affected by several other chemicals and compounds that settle on the surface of the building. If these eat into the outer layer of the metal, your house will then be exposed to the weather elements and hence rust can easily form.
It’s also important to clean the roof of your home whenever any dirt or leaves collect there. These can cause water stagnation on your roof hence increasing the chances of rusting.
Protecting the Metal
To maintain metal buildings, the surfaces are usually coated with a protective substance or simply painted. Over time, the weather elements will take a toll on these surfaces, remove the paint, and eventually expose the metal to rust.
To prevent this from happening, you will need to regularly repaint your metal home. This is something you can do, for example, after washing the metal surfaces, say, once in a year.
The paint acts as a protective layer over the metal hence preventing corrosion by rust.
Here is a video showing how a metal roof can be repainted as part of the process of restoring the value of a home:
When constructing your barndominium, the best metal to use is steel. It is strong and has some level of resistance to rust formation.
Apart from the advantage of durability, metal home barndominiums have several other advantages, these include:
- Steel barndominiums are safer since metal is fire-resistant.
- Steel is relatively cheaper than wood and other construction materials.
- Metal barndominiums are faster to construct, especially if you use a barndo kit.
- Steel structures can withstand earthquakes and thunderstorms.
- It’s simple to put up a steel barndominium once you have the sections brought to your construction site.
How Do You Calculate Depreciation on a Home?
If you’ve bought or built a barndo and have put it up for rent, you have an opportunity to benefit from tax savings on the property. But exactly what amount is the depreciation of your home? How much cash will you be saving in the form of tax relief?
To accurately get these figures, you need to calculate the depreciation on your home. You will take the value of the property and divide it by the number of years of its expected lifespan. The amount you get is the tax relief you’ll be claiming each year.
But depreciation calculation isn’t easy mathematics (as is expected with anything involving the IRS). You can do yourself a huge favor by reaching out to a qualified tax professional who knows the ins and outs of the powers (i.e., the IRS).
But even as your accountant handles the complex computing, you might as well have an idea of how to do these calculations. Read on to find out how to calculate your home depreciation.
When it comes to depreciating a property, there are three fundamental factors you need to identify:
- The property’s basis, i.e., the value of the home
- The duration of recovery, i.e., the homes expected lifespan
- The method you choose to depreciate the asset
This refers to the value of the property or the amount you spent to acquire it.
If, for example, you bought your barndo, as opposed to building it yourself, the property basis is whatever price you paid. It also includes a number of fees and expenditures you paid for when acquiring the home. These include:
- Title insurance
- Settlement fees
- Closing costs
- Legal fees
- Transfer taxes
That said, not all costs are included in the property basis. Consult your tax professional for clear guidance on what may be included.
On the other hand, if you built your barndo from scratch, getting the property’s basis will require the property’s valuation. Check out this video below as an example of the cost breakdown of building a pole barn house:
A valuation can be done in a number of ways. An appraisal, a tax assessor’s report, or an insurance agent’s estimate can help you get the value of your home. While each of these methods can give different figures, they are all viable for determining your property’s value for depreciation purposes.
After getting the value of the property, separate the cost of the land on which it seats. This is important because only the building cost is depreciable. Land does not depreciate and so its cost is not included when calculating depreciation.
After adding the necessary costs of your home and subtracting the cost of the land, you now have the adjusted basis. This is the value on which you will base your depreciation amount.
The Duration of Recovery
This refers to the useful life of the property. It’s the approximate number of years (determined by the IRS) that a property is expected to last before it has completely depreciated.
For residential real estate, the IRS has set 27.5 years as the depreciation period. So the asset is depreciated at a rate of 3.636% each year for 27.5 years.
Let’s take an example. If you have a property worth $100,000 (after removing the cost of the land), the depreciation deduction will be $3,636.36 per year.
The Depreciation Method
There are two methods of depreciating property. They are:
- The General Depreciation System (GDS) or
- The Alternative Depreciation System (ADS)
Most often than not, properties placed in service use the GDS so you are most likely to use that unless you have reasons to use the ADS. Consult your tax accountant about this before making a decision.
Using the GDS method, your property can be depreciated for 27.5 years.
You can download the instructions for Form 4562 on the IRS website for a detailed guide on calculating your depreciation.
How Much Do You Save?
After doing the calculations above, you may be wondering, ‘how much exactly do I eventually save as a result of depreciating my home?’ Well, the depreciation deduction reduces your tax liability in this way:
Let’s continue with our example above of a property worth $100,000. As you file your annual tax return, you typically report your rental income and expenses on the relevant line of Schedule E. In the 1040 form, you have your net gain or loss recorded.
One of the expenses you’ll include on Schedule E is the depreciation we’ve calculated above, i.e., $3,636.36. This means the depreciation amount reduces your tax liability for the year. So if you’re in the 22% tax bracket, for example, you’ll save $799.99 ($3,636.36 x 0.22) in taxes that year.
What Causes a Home’s Value to Depreciate?
Now that we’ve established that homes, including steel home barndominiums, depreciate over time, let’s have a look at the factors that cause this depreciation. These are the same forces that affect the value of a property (they are also some of the components normally assessed during the valuation of a property).
This is, by far, one of the key determinants of the value of a home. The economic state directly affects the housing market hence determining the pricing of homes.
During economic weakness, the rate of unemployment goes up, resulting in lowered housing demand because people are not looking to buy new homes or upgrade their living standards. What is more, if a number of people suddenly lose their jobs, they may opt to sell their homes to make ends meet.
As a result, the low economic state creates a high supply and low demand in the housing market, causing a drop in property prices.
The opposite is true. When the economy is strong and buyers are financially fit, there will certainly be an increase in housing demand and this will drive up prices.
This is another important factor that determines the value of a home. You may have heard it said how important location is in real estate, well, that’s very true.
When you think of a property’s location, you have to consider what is in the neighborhood. If, for example, a home is near a power plant or an airport, there are likely to be several noise complaints from homeowners in the area. This would negatively affect the value of a property in such an area; hence the price tag on a home would be relatively low.
The security of a neighborhood will also affect home values. An increase in crime, violence, or theft would drive away home buyers resulting in the house prices taking a nosedive.
On the other hand, a safe and secure neighborhood draws in more home buyers and increases the value of a home.
Apart from external factors, the state of a home in itself affects its value.
Think of the size and style of the home. The bigger it is, the higher its value, and the more sophisticated the building style, the higher it’s likely to be priced.
The condition of the property also refers to how the property has been maintained. If a home has not been occupied for a long time and has been left with a bushy yard, smelly interiors, or broken fixtures, then it’s most likely not going to fetch a good price.
Therefore, it’s best to maintain both the interior and exterior of a property in good condition as this can restore its value.
If a home is near a school, hospital, shopping mall, and other amenities, it’s likely to attract more buyers. Most people prefer living somewhere they can easily access different amenities. Therefore, they would be willing to pay top dollar for properties in such vicinity.
This means a home’s value is automatically raised if there are amenities close by, while properties that are far from all the action will probably command a lower price.
All assets and properties, including steel home barndominiums, depreciate in value over time. And according to the IRS, if you use said property for rental purposes or any other business, then the depreciation can work in your favor. Depreciation can be a valuable tool to recoup the cost of buying the property by spreading the cost over several years.
Tax relief gained from depreciation deduction can help you save hundreds if not thousands of dollars every year. It’s important that you take advantage of these benefits.
And because of how complex tax laws are, it’s advisable to work with a qualified tax accountant when operating or establishing your rental property business and calculating depreciation.
- Million Acres: Real Estate 101: Rental Property Depreciation Rules All Investors Should Know
- Family Handyman: 10 Surprising Things That Decrease Property Value
- Fortune Builders: How Much Does A House Depreciate Per Year?
- Elite Steel and Supply: Benefits of Metal Barndominiums
- Crazy House Reviews: How Long Do Steel Frame Houses Last?
- Investopedia: How Rental Property Depreciation Works
- Mashvisor: Here’s How To Calculate Depreciation On Rental Property
- IRS: Publication 527 (2019), Residential Rental Property