If you’re in real estate, you know tax savings can make or break your cash flow. One of the best ways to reduce your tax bill? Depreciation. It lets you write off the wear and tear of your property over time, lowering your taxable income.
But here’s the catch—traditional depreciation is slow. If you’re waiting 27.5 years to fully depreciate a rental property, you’re missing out. Accelerated depreciation lets you front-load those tax savings, putting more money back in your pocket today. Let’s break down how it works.
How Depreciation Normally Works
The IRS assumes buildings lose value over time, so they allow real estate investors to deduct that loss gradually. The standard rules:
- Residential properties: Depreciate over 27.5 years
- Commercial properties: Depreciate over 39 years
For example, if your rental property (excluding land) is worth $275,000, you can typically deduct $10,000 per year ($275,000 ÷ 27.5).
That’s great, but what if you could deduct more faster? That’s where accelerated depreciation comes in.
How to Speed Up Depreciation (And Your Tax Savings)
Instead of treating your whole building as one asset, accelerated depreciation lets you break it into shorter-lived components and write them off much sooner. There are three main ways to do this:
1. Cost Segregation: The Key to Faster Write-Offs
A cost segregation study (or “cost seg”) separates parts of your property into different categories with shorter depreciation periods—5, 7, or 15 years instead of 27.5 or 39.
For example, things like:
Flooring Appliances Light Fixtures Landscaping
Instead of depreciating with the building, these assets can be deducted in just a few years. That means bigger tax deductions upfront and more cash in your pocket.
Traditionally, cost segregation studies were expensive, making them less accessible to small investors. While DIY cost segregation options have emerged, they come with significant risks. Many DIY approaches rely on simplified methods that the IRS explicitly warns against, increasing the potential for audits and penalties. Therefore, it’s crucial for investors to carefully weigh the benefits and risks before opting for a do-it-yourself cost segregation study.
2. Bonus Depreciation: Take Big Deductions Immediately
Bonus depreciation lets you deduct a large portion of eligible assets immediately.
Until recently, investors could deduct 100% of qualifying assets in the first year. That percentage is now phasing out, so if you want to take advantage of it, the sooner, the better.
The best part? Bonus depreciation pairs perfectly with cost segregation—once you’ve identified short-lived assets, you can write them off even faster.
3. Section 179: Great for Business Owners
If you own commercial real estate, Section 179 deductions let you write off certain improvements immediately instead of over decades.
Eligible upgrades include: HVAC systems Security systems Roofing and fire alarms
This works best for business owners who use their property actively.
Who Benefits Most from Accelerated Depreciation?
If you fall into one of these groups, this strategy is worth exploring: Rental property investors who want to reduce taxable income. Business owners making upgrades to commercial properties. High-income investors looking to offset other income.
Things to Keep in Mind
Depreciation Recapture – If you sell your property, the IRS may require you to pay back some of the tax benefits. Proper planning can minimize this.
Work With a Pro – Tax laws change, and not every property qualifies. A real estate tax advisor can help you navigate the details.
Keep Good Records – If you’re using cost segregation or bonus depreciation, documentation is key.
How to Get Started
Consult a tax professional to see if these strategies fit your situation.
Consider a cost segregation study
Check eligibility for bonus depreciation and Section 179 deductions.
Taking advantage of accelerated depreciation can mean huge tax savings. If you own investment property, don’t leave money on the table—start exploring your options today!
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