This past weekend, I had one of my favorite conversations with a friend on the subject of accumulated depreciation vs. depreciation expense. The conversation was about how one might be able to use the accumulated depreciation on the house to offset an early retirement account or some other expense. At the time, I thought that was a little off.
In a recent interview with the New Yorker, I discuss the notion of using accumulated depreciation as a way to offset a retirement account. The point is that you can’t use the accumulated depreciation on a house loan as a replacement for a real estate loan. You can use it to offset a real estate loan but there is no way you can use it on a house loan.
I agree that the concept of accumulating depreciation sounds like a bad idea and that you should probably look at the real world. However, I’m still not convinced that the idea of accumulating depreciation and using it as a payment for an asset is a bad idea. On the contrary, I think that it could be an extremely valuable tool if used in the right way. In the video above I show the difference between accumulated depreciation and depreciation expense.
The reason I listed more money as a loan is because I am using the net proceeds rather than the loan’s actual amount. The net proceeds is a lot less than the actual amount of borrowed money. The net proceeds are mostly paid to creditors, so a lot of money is only going to be used for personal and financial projects. The real money is borrowed by the lender and is used for personal and financial projects.
Depreciation expense is a percentage of what the property actually costs to maintain. It’s the cost of maintaining it that is being paid out, not the amount of money that was spent on it.
In other words, when the lender is spending money on a home they own, they are borrowing the money from their home. When they loan it to their lender, they are borrowing from their lender. So the lender is only making a personal loan to the lender, i.e. they are being paid a percentage of the cost of the home, not the actual cost of it.
Because of this, the cost of maintaining a home is generally lower than the purchase price (except if you are buying a rental). In this way, the depreciation expense is generally a more realistic estimate of the cost of maintaining a home. This doesn’t mean that a mortgage is always a good investment, it just means the depreciation expense is often a better estimate of the cost of maintaining the home.
In general, we are being paid a percentage of the cost of the house, but the actual cost of the house is a fixed amount for the life of the mortgage. If you were to buy a home for $200,000, the cost of the house over time was the cost of the mortgage (and its amortization) times $200,000. So the depreciation expense is essentially the amount of the loan divided by the number of years the loan is outstanding.
The depreciation expense is a little bit more precise than the depreciation cost. It is based on the amount of the house’s real estate value and the amount of depreciation it would take to pay the mortgage. This is actually a much more accurate estimate because the house is a house of the same size in its size as the mortgage.
On a mortgage the actual value, the purchase price, of property is determined by the loan agreement. So the more the loan agreement the more accurate the approximation. For example, the average mortgage agreement is 20% down to 40% down. The depreciation expense is the amount of the mortgage that is taken away from the house and put into the bank and is the amount of the depreciation that is taken away from the house and put into the bank.