Home and Rental Depreciation

Your home and rental property will lose value over time, which influences not only your insurance coverage but also your taxes.

Christine Lacagnina Written by Christine Lacagnina
Christine Lacagnina
Written by Christine Lacagnina

Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.

Reviewer: Jeffrey Green Reviewed by Jeffrey Green
Reviewer: Jeffrey Green
Reviewed by Jeffrey Green

Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career.  He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.

Twilight exterior of home and landscape. Home and Rental Depreciation.

A loss in property value over time is commonly referred to as depreciation. Home depreciation is a critical concept within the insurance world because it directly influences the claim amount paid by the carrier. It's also a big factor if you own rental properties, as rental property depreciation is calculated within your taxes.

An independent insurance agent can help you get the right home insurance or landlord insurance for your home or owned rental property. They'll help you calculate your insurance needs while factoring depreciation into the mix. But for starters, here's a breakdown of home depreciation and rental depreciation and why they're so important to understand.

What Are Home and Rental Depreciation?

Simply put, home and rental depreciation refers to how your property loses value over time. In terms of home depreciation, this is something to be aware of because it affects the amount of payout you can receive for a home insurance claim after property damage or destruction. 

Your carrier will likely not pay out the same amount to replace or repair a piece of property five years down the road as they would have when it was brand new. The same thing applies to having to repair or rebuild your home's structure. The ultimate claim payout likely wouldn't be as high a few years into owning your home.

Rental depreciation is basically the same concept, just applied to any rental properties you own, and it's a key factor when filing your taxes with the IRS. The IRS allows rental property owners to deduct rental depreciation from their taxable income annually. 

Rental property owners are typically allowed to assume their property will lose 3.6% annually, and this calculation can be subtracted from their total taxable income. Further, rental property owners are typically capped at claiming this depreciation amount after 27.5 years.

How Do Insurance Companies Calculate Depreciation? 

Calculating depreciation starts with the property’s Replacement Cost Value (RCV) and its estimated life expectancy. The RCV is the current price of repairing or replacing an item with an equal item. A property's life expectancy is the average amount of time it can be used. 

For example, let’s say your new kitchen appliances get destroyed in a grease fire. You bought the refrigerator, oven, and dishwasher brand new three years ago. All the appliances were working well at the time and in normal condition for their age. The same kitchen equipment is currently sold in several retail stores for about $3,200 (RCV) new. 

These three appliances have a life expectancy of 10 years, which means they lose 10% of their value each passing year. In your situation, the kitchen appliances lost 30% or $960 in value (10% annual depreciation x 3 years of use) at the time of the grease fire. 

This formula works similarly when applied to the structural elements of your home. Parts of the dwelling, like the gutters and furnace, are also subject to depreciation. 

For example, asphalt roof shingles normally last around 20 years and typically depreciate 5% per year. Let’s say your roof is 15 years old at the time of a wind and hail storm. This means the insurance company will subtract 75% of the value (15 years x 5% depreciation per year) of a brand-new replacement roof. 


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How Will Depreciation Determine My Claim Payout? 

The first thing that will determine your claim payout is the terms of your policy. Some homeowners coverage is based on an Actual Cash Value (ACV) claims reimbursement schedule, while other policies are based on a Replacement Cost Value (RCV) schedule. 

Of course, depreciation is the second thing that will influence the claims settlement amount you receive. If you're not familiar with whether your home insurance includes ACV vs. RCV coverage, you can ask your independent insurance agent to review your policy with you.

What’s a Recoverable Depreciation Clause? 

Sometimes, homeowners policies include a recoverable depreciation clause. A recoverable depreciation clause permits policyholders to claim the depreciation of their asset along with the ACV. Insurance policies that include this clause will expect you to repair or replace covered items within a certain time frame. 

If you didn’t make a needed repair or complete a certain replacement prior to the date of loss, then your recoverable depreciation could be voided. You’ll also need to keep detailed records to prove that you followed the rules and regulations of the clause.

Recoverable depreciation is a feature that's sometimes not worth it when you factor in the deductible. If your home policy has a $2,000 deductible, your kitchen claim might get you a $960 ACV payout. Plus, you could also expect to receive the $2,240 depreciation amount. 

All this is payable to you after your $2,000 deductible is met. So, you’ll end up with a net positive of $1,200 to replace your appliances. This amount isn't necessarily enough to buy brand-new appliances. 

3 Quick Home and Rental Depreciation Tips

There’s still more to understand about depreciation and how it impacts you. Here are some quick tips to help. 

  1. Items max out at 90% depreciation and won’t be depreciated beyond that percentage.
  2. Quality, workmanship, frequency of use, storage, and upkeep are all factors in determining the lifespan (and ultimately depreciation) of an item. For home materials, the quality of installation, design, and environmental conditions also make a difference. 
  3. Specialty items like collectibles, fine jewelry, antiques, firearms, and art can actually appreciate or increase in value over time. That’s why your independent insurance agent will probably recommend purchasing additional coverage for these types of unique valuables. 

If you're still confused about home or rental depreciation and how it impacts your coverage, your independent insurance agent might be able to help answer any remaining questions.

Home and Rental Depreciation Calculators

Are you looking for a home depreciation calculator or a rental depreciation calculator? There are plenty of resources available online to help you calculate home depreciation or rental depreciation, easily found with just a quick search. If you're curious about how home or rental depreciation affects your home insurance or landlord insurance coverage, your independent insurance agent can help answer any of your questions.


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Why Work with an Independent Insurance Agent?

Independent insurance agents are experts in finding you the right kind of home insurance or landlord insurance and any other type of coverage you need. They can shop and compare policies from many different insurance companies for you, then present you with only the best quotes together in one place. Also, they're available down the road to help you file claims if you ever need to. 

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