Use depreciation to reduce the costs basis of your condominium investment. Depreciation is an accounting method used to calculate the decline of an asset's value over its useful life. The Internal Revenue Service allows depreciation as an expense against taxable net income. Only income-producing real estate properties may be depreciated. Depreciation theoretically encourages investment in the real estate asset, according to "West's Encyclopedia of American Law."
Calculate net profit or loss on a rental condominium by subtracting deductible expenses, including depreciation, from income. Expenses include operating expenses, mortgage interest and depreciation.
Let's say you purchase a $200,000 condominium. To calculate the annual depreciation amount, divide $200,000 by 27.5 years. The result, $7,272, is added to other expenses -- operating expenses and mortgage interest -- and subtracted from net taxable income. If the condominium has net expenses of $25,000 and rental income of $16,000, a net loss of $9,000 results.
The condominium's value shows a loss on paper even if the condominium may be appreciating in value in the real estate market.
Continue to subtract the annual depreciation figure from the condominium's cost basis each year. Unlike some deductions, taking depreciation against a rental property isn't optional, according to "Every Landlord's Tax Deduction Guide" by Stephen Fishman in 2010. Failing to depreciate the property will cost money in the future. The IRS adds depreciation back to the cost basis when you sell the property.
Talk to your accountant about the computation of depreciation and allowable expenses against rental income. Author Stephen Fishman encourages landlords to take a hands-on approach in calculating real estate depreciation. Understanding the value of depreciation can assist an investor in making real estate acquisition decisions.
Understand the tax impact of depreciation recapture before selling a property. Say you've held a condominium purchased some years ago $100,000. Depreciation of $40,000 over time lowers the cost basis to $60,000. Selling the property nets $130,000, or $70,000 above the depreciation-adjusted cost basis rather than the original $100,000 purchase price, according to "New York Real Estate For Brokers" by Marcia Darvin Spada in 2008.