Estimating Salvage Value

[iHateUserNames]

I'm trying m2: to figure out how to estimate the salvage value of a commercial multifamily building. This is a generic question, there is no specific building I have in mind.

I'm simply trying to cement the formula to calculate depreciation for tax purposes, and salvage value is the sticking point. :new_multi:

Everything I've read on the subject (that was of any actual value) points to an appraiser providing the salvage value. So, apparently you folks are the source of the estimate it would seem.

I've created a spreadsheet that calculates a bunch of different values so as to determine if a particular building is a worthwhile investment. While it's not absolutely critical, having the depreciation numbers would really round out the presentation. It might turn a borderline loser into a winner for the right investor. If there's interest in pursuing the investment a full blown appraisal will be ordered but again - I'm trying to do my own estimates so I have something attractive to present and persuade prior to spending money on something that might not be attractive enough to buy.

Thanks in advance

 

[Kali the Boston Terrier]

Its unfortunately not a simple xyz = Salvage value, every property is different and does not lend itself to formulas or "rules of thumb". Appraisers tend not to use the term salvage value very often, nor do we really operate in rule of thumb formulas. Although common in the accounting and BV value areana. Typically if you needed the fully depreciated value of a structure that has sold. You would determine the land value.

Sale Price-Land Value=Depreciated Building Value If that cost is above the cost of demolition and disposal, you either have some remaining economic life or I guess what you could consider salvage value.

 

[Terrel L. Shields]

Are you referring to salvage value or the reversion value? Reversion would indicate the estimated value at the end of the holding period. If the holding period was = the economic life, then the reversion value would be the land value less cost to cure (demolish) at some future date...pretty much a SWAG factor since you have to project future land values as well as future costs.

 

[Dennis J. Black ASA IFAS]

You are going down the path of ruin if you think salvage value has a whole lot to do with real estate investing.

 

[PropertyEconomics]

I have often found that salvage only slightly offsets the cost of demolition and then only if the demolisher finds something they wish to salvage and are willing to give you credit for it. Typically Salvage is NADA, ZILCH, ZERO .... in my experience.

 

[Fred]

Salvage may well be negative. Even if you have recyclables or a market for rubble, it probably doesn't exceed the cost of separation and/or carting.

 

[iHateUserNames]

Thank you to all of you that responded. Unfortunately I'm still at a loss as to how to proceed. The purpose of my question is to calculate depreciation for tax purposes. I'm using straight line depreciation, and the Excel function "SLN" which requires the cost, life and salvage. According to one source:

cost is the original cost of the asset.
salvage is the salvage value after the asset has been fully depreciated.
life is the useful life of the asset or the number of periods that you will be depreciating the asset.

That's the extent of my knowledge on the subject. I hope that clarifies the question. Perhaps someone can give me a relatively simple answer based on that additional info?

Thank you most kindly.

 

[PropertyEconomics]

Thank you to all of you that responded. Unfortunately I'm still at a loss as to how to proceed. The purpose of my question is to calculate depreciation for tax purposes. I'm using straight line depreciation, and the Excel function "SLN" which requires the cost, life and salvage. According to one source:

cost is the original cost of the asset.
salvage is the salvage value after the asset has been fully depreciated.
life is the useful life of the asset or the number of periods that you will be depreciating the asset.

That's the extent of my knowledge on the subject. I hope that clarifies the question. Perhaps someone can give me a relatively simple answer based on that additional info?

Thank you most kindly.

I mean this will all due respect ... consult a CPA. Depreciation for tax purposes has nothing to do with "value" in the traditional sense.

 

[Howard Klahr]

Salvage value is generally related to personal property (i.e. fixtures, equipment,etc) not real property. However, in regard to your reference about taxes, I will assume you are performing an analysis related to income taxes on a real estate investment. The IRS limits depreciation expense for real estate investments to 27.5 years for residential property and 39 years for non-residential property.

For more details on this topic I suggest you go to IRS.gov and obtain Form 4562 Depreciation and Amortization as well as the related instructions.

 

[Dennis J. Black ASA IFAS]

Consult a CPA who understand how to classify different components.