The depreciation is not going to be claimed but is just to be used for calculating the Fair Market Value as you'll see later...
Here's the calculations I came up with. The Cost Basis is calculated based on the discounting method using the Producer Price Index (PPI) rate of change, as shown by the example in this article:
https://www.thebalancemoney.com/partial-dispositions-3192873
For the PPI historical data, please see:
https://fred.stlouisfed.org/series/WPUFD49207
BTW, I found a higher value of $1,000,837 for my property as of the disaster on Feb/2024 from Realtor.com, so this is the amount I'll use in the calculations. Also, the cost of the new roof is actually only $22,080, not $25,000 as I originally stated in my first post. Sorry for this mistake.
Purchase price of Home: $268,000
Date Purchased: 4/4/2002; PPI on this Date: 138.8
Date of Disaster: 2/6/2024
Cost of New Roof: $22,080
Date New Roof in Service: 2/21/2024; PPI on this Date: 256.565
PPI Rate of Change = (256.565 - 138.8) / 138.8 = 0.848451 or 84.8451%
This means the cost increased from 4/4/2002 to 2/21/2024 by 84.8451%.
Therefore, Cost Basis of Old Roof = Cost of New Roof / (1 + 0.848451) = $11,945.14
Depreciation of Old Roof:
No. of Years Life Span: 27.5 years
Annual Depreciation Rate = Cost Basis of Old Roof / 27.5 = 11,945.14 / 27.5 = $434.36861 per year
No. of Days from Purchase to Disaster Date: 7,978
No. of Years to Depreciate = 7,978 / 365.25 (the .25 is to account for leap years) = 21.84257 years
Depreciation from Purchase to Disaster Date = Annual Depreciation x No. of Years = 434.36861 x 21.84257 = $9,487.73
Fair Market Value:
Value of Home at Disaster Date: $1,000,837 (from Realtor.com)
Percent Change in Home Value = (1000837 - 268000) / 268000 = 273.45%
If the entire home increased in value by 273.45%, then we can apply this increase to the roof also.
Thus, Value of Roof at Disaster Date = Cost Basis of Old Roof x (1 + 273.45%) = 11945.14 x (1 + 273.45%) = $44,608.71
This looks very high since the roof has depreciated, so let's deduct the depreciation.
Value of Roof After Depreciation = 44608.71 - 9487.73 = $35,120.98
Even after deducting depreciation the value still looks so high considering that the new roof cost only $22,080 and the old roof is close to being fully depreciated. It's only the increase in market value of the entire home that is pumping up the value of the old roof. I'm afraid to estimate the FMV of the old roof as $35,120.98 so I'll just limit it to the cost of the new roof. Thus,
FMV of Old Roof Before Loss = Cost of New Roof = $22,080
FMV of Old Roof After Loss = $0 (since the old roof was trashed and gone)
I hope my calculations are valid/acceptable and correct and make sense. Please let me know what you think. Does the $22,080 FMV look excessive to you? Any comments would be greatly appreciated.
Thanks! 😀
