Business Definition for: replacement reserve
replacement reserve
an amount set aside from
Net Operating Income
to pay for the eventual wearing out of short-lived
assets
.
Example:Singer buys new apartments, each containing $3,000 worth of carpeting and appliances that have a 10-year
useful life
. Each year she deposits $300 in a replacement reserve account to pay for recarpeting and new appliances in 10 years.
See also
reserve fund
replacement reserve
Related Terms:
an account maintained to provide funds for anticipated expenditures required to maintain a building. A reserve may be required by a lender in the form of an escrow to pay upcoming taxes and insurance costs. A replacement reserve may be maintained to provide for replacement cost of short-lived components, such as carpets, heating equipment, or roofing. Deposit of money into such a fund does not achieve a tax deduction.
Example: A property management firm anticipates that property taxes will be due in 6 months, insurance must be renewed in 2½ years, and carpeting must be replaced in 6 years. Accordingly, they establish a reserve fund by depositing a portion of monthly revenues in an account. Monies from the fund will be used at the appropriate time to meet the future expenditures.
an account maintained to provide funds for anticipated expenditures required to maintain a building. A reserve may be required by a lender in the form of an escrow to pay upcoming taxes and insurance costs. A replacement reserve may be maintained to provide for replacement cost of short-lived components, such as carpets, heating equipment, or roofing. Deposit of money into such a fund does not achieve a tax deduction.
Example: A property management firm anticipates that property taxes will be due in 6 months, insurance must be renewed in 2½ years, and carpeting must be replaced in 6 years. Accordingly, they establish a reserve fund by depositing a portion of monthly revenues in an account. Monies from the fund will be used at the appropriate time to meet the future expenditures.
Referring Terms:
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