For residential real estate, the cost of a building can be deducted in equal amounts (i.e. "straight line depreciation") over 27.5 years and, for commercial real estate, over 39 years from the date the property is placed in service. Through proper planning, you can massively increase your depreciation deductions by conducting a cost segregation study of the property.
Your rental property can be divided up for depreciation purposes between its real estate components and non-real estate components, aka personal property (such as appliances, flooring, landscaping, etc.), and you can depreciate that personal property separately from the real estate elements of the property. These non-real estate items can be depreciated over a much shorter period e.g., 3, 5, 7, or 15-year periods, depending on the specific type of asset.
The ability to depreciate a portion of the cost of a building over a shorter time can result in a substantial increase in tax deductions.
Example: The depreciation deduction on $100,000 of residential real estate in a year would be approximately $3,636. If that same $100,000 were depreciated over 15 years, the deduction would be $6,667 and if depreciated over 5 years, it would be $20,000.
Not only does cost segregation allow you to depreciate components of the building over a shorter life, but it also allows you to depreciate it faster over that shorter life, thereby further increasing depreciation deductions.
5-year property – which includes appliances, carpets, and furniture, can be depreciated using the 200% declining balance. This method permits deduction of 200% of the allowable straight-line depreciation. 15-year property – can be depreciated 1.5 times faster using the 150% declining balance method. The 200% or 150% declining balance methods are used to calculate the deduction until the time that the straight-line method would result in a greater deduction.
Moreover, the value of the personal property is also eligible for bonus depreciation. While some of these amounts may need to be recaptured at the time of sale, the value of the tax deferral can nevertheless be very substantial.
Bottom Line: Conducting a cost segregation analysis for your property can substantially accelerate the pace at which you can claim depreciation deductions and the proposed extension of the bonus depreciation rules could further increase the available deduction.
"Things may come to those who wait, but only the things left by those who hustle." -Abraham Lincoln (?)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
