Although in the real world, accountants working for real estate investors usually do these calculations, Real Estate License Exam writers will expect you to understand and be able to apply the basics. This type of depreciation is sometimes called cost recovery and you may see that term on the exam.

This type of depreciation has nothing to do with a property going down in value like regular depreciation, but rather is based on government regulations that are designed to help real estate investors reduce their tax burdens.

For example, say you have a building worth $250,000. You are allowed to depreciate this property over a period of 27.5 years. What is the annual amount of depreciation?

Cost of property ÷cost recovery period = annual amount of depreciation

$250,000 ÷27.5 =$9,090.91

Now suppose you were asked what the annual rate of depreciation is. You don’t need the dollar amounts to figure that one out. You need only the cost recovery period.

You are allowed to depreciate a building over a period of 39 years. What is the annual rate of depreciation?

1 ÷39 = .0256 or 2.56 percent per year