In Part 1 and Part 2 of this series, we discussed the definitions as well as what factors decrease the useful and physical life of a commercial building. In this article, we examine a specific property type of commercial real estate that has important deviations from a “typical” older commercial property: residential rental property. We will explore why residential rental buildings (primarily apartments) have shorter economic useful life expectancies and what the main limiting factors in extending a property’s economic useful life is.
Economic Life of an Apartment is 27.5 Years
When considering the purchase of an older residential rental property (such as an apartment) it is important to understand that the useful economic life of an apartment building is significantly shorter than that of a commercial building.
As a reminder, the IRS allows 27.5 years over which you can depreciate residential rental buildings and 39 years for retail and other commercial structures. This shorter depreciation schedule was established to encourage construction of new rental housing, however, it also reflects the fact that residential rental structures have a significantly shorter useful lifespan than commercial structures. The tax code presumes that the useful life of a residential rental building is only 70% of the useful life expectancy of a commercial building.
What factors contribute to a shorter useful life for residential rental housing properties?