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How It Works
Straight-line depreciation spreads an asset's cost evenly over its useful life. You subtract the expected salvage value from the purchase cost, then divide by the number of years. The result is a fixed annual expense.
The depreciation basis is simply cost minus salvage value — the total amount available to depreciate. For tax purposes, residential rental property depreciates over 27.5 years and commercial property over 39 years.
Example Problem
A delivery truck costs $45,000 with an expected salvage value of $5,000 after 8 years.
- Depreciation basis: $45,000 − $5,000 = $40,000
- Annual depreciation: $40,000 / 8 = $5,000 per year
After 5 years, accumulated depreciation is $25,000, leaving a book value of $20,000.
Frequently Asked Questions
What is straight-line depreciation used for?
It is the most common method for financial reporting and tax deductions. Businesses use it to allocate the cost of equipment, buildings, and vehicles over their useful lives, reducing taxable income each year.
How long do you depreciate rental property?
The IRS requires residential rental property to be depreciated over 27.5 years and commercial property over 39 years using the straight-line method. Land is never depreciated.
What is salvage value?
Salvage value is the estimated resale or scrap value of an asset at the end of its useful life. A $50,000 machine with a $5,000 salvage value has a depreciable basis of $45,000.
Related Calculators
- Adjusted Basis Calculator — track how depreciation affects asset basis.
- Gain on Sale Calculator — calculate capital gains after depreciation.
- Net Operating Income Calculator — understand income before depreciation.
- Present Worth Calculator — discount future salvage values to present dollars.
Reference: Newnan, Donald G., Ted G. Eschenbach, and Jerome P. Lavelle. Engineering Economic Analysis. Oxford University Press.