How to Calculate the Depreciation of Home Improvements

Add all costs associated with the improvement. This includes materials, labor, permits and fees for financing. Assume it cost $25,000 to do the improvement.

Determine the life use of the improvement. Something like a roof may have a warranty of 20 years, giving it a 20-year life use. An addition, however, can depreciate the cost over the expected use of the home, generally the remaining mortgage payment years. Assume a 20-year life use.

Get the depreciation percentage. The Internal Revenue Service has depreciation tables to determine the percentage you will use for each year. The percentage is higher in the early years and decreases over time when minor repairs or maintenance may be required. The first year of a 20-year depreciation is 3.75 percent of the costs at time of publication.

Calculate the depreciation amount for the first year. This is $937.50. However, if you didn't do the improvement until April 7, you must pro-rate the $937.50 based on 12 months in the year. The IRS uses a "close enough" method, starting the depreciation as of April 15, giving eight full months of depreciation and one half month. In dollar value, this is $78.12 for every full month, or $625 plus $39.06 for half of April for a total of $664.06. You don't need to amortize future years.