Depreciation Suggestions

spg993tt

Hi. I'm a multi-decade user of Quickbooks. Using Quicken now for my personal accounts. Would appreciate some suggestions or ideas on how to handle depreciation. Ive seen some folks suggest adding an asset account for deprecation, or really two accounts, a) accumulated depreciation and then one for b) dep expense. credit accumulated, debit the expense account.
folks talk about how that then shows the asset's 'value' going lower and lower each time you enter the depreciation, whether its just remembering or via a reminder/schedule.
my problem with that is that I don't believe your books and records reflect your true net worth/asset valuation.
for example...i buy a rental property for $500,000. lets say I depreciate$25,000 per year. after year one on quicken's asset list is would be down the 25k, =475k. following year, down to 450k.000
but the reality is the property might very well be valued well above 500, as it might appreciate each year...or at min stay near 500, sure maybe it goes down a bit due to market conditions or up due to market conditions, if you could get an appraisal...but it does NOT go down in value 25k year due to your taking the depreciation expense. effectively what we're now saying is that its not really its value or marketable price, but its "cost basis" so if/when you sell it at 700k, and it shows 325 (after many years of depreciation)... you' have a net gain of the difference between the two.
but its most likely worth MORE than the 500.
just wondering how one could accomplish that...where you see the 500k (or whatever is the current market value) of the asset (which you'd have to manually enter or reconcile every so often)..but also have an account that tracks depreciation.
in all fairness, depreciation is an expense which you take on your tax return, and you'd want to track it over the years so you know your cost basis, but it shouldn't impact your networth or the value of the asset/property, just your cost basis when you do your taxes.
there ought to be a better way of doing it.
thoughts? ideas?

Tom Young

You have a conflict between a semi-GAAP method of accounting and a "statutory" version of accounting (i.e., "income tax") and it's tough to square that circle.  For tax purposes you have an asset that's depreciating and for your semi-GAAP approach you have an asset that's appreciating.  Tough to reflect both versions of "what's happening" in one Quicken file. 

About the only way I could think of doing this in one file would be to have the asset in the file twice, once for the semi-GAAP version where you make entries to record appreciation against an "unrealized gain" Category, (you could do this easily in an Investment Account with the house as a "security") and then again as a "fixed cost" asset with entries to a contra-Account against a "depreciation" Category, and then try to keep it all straight by running special Net Worth/Income and Expense reports that selectively use different Accounts and Categories.

I'd advise that you run your Quicken file in a fashion that makes "real world" sense to you and simply keep notes or schedules "on the side" of the special income tax accounting issues.

J_Mike

I did as @Tom Young suggested and kept two asset accounts for each rental property.

The first account reflected the the current FMV of the property and was included in ny net worth estimate.

The second account reflected the "book value" for tax purposes. This account included original purchase price, purchase costs, depreciable improvement costs, depreciation, etc. - i.e., all retailed costs related to tax reporting. I kept this account as a Separate Account - not included in net worth calculations.