What Real Estate Investors Should Know About Depreciation
A practical guide to building depreciation, land allocation, capital improvements, repairs, cost segregation, and the effect of depreciation when a property is eventually sold.
Depreciation Is One of Real Estate's Most Important Tax Concepts
When you purchase a rental property, you generally cannot deduct the entire cost of the building immediately.
Instead, depreciation allows an investor to recover the cost of qualifying income-producing property over prescribed periods. Depreciation generally begins when the property is ready and available for rent, not simply when the property was purchased.
Land Is Different From the Building
Land itself is not depreciable.
When purchasing real estate, the property's basis therefore generally needs to be allocated between:
- Land — Not depreciable
- and
- Building — Potentially depreciable
Additional assets and improvements may have their own recovery periods.
Residential Rental Property
Under the general MACRS rules, residential rental real estate is generally depreciated under GDS using the straight-line method over 27.5 years and the mid-month convention.
Other property associated with a rental may have shorter recovery periods. For example, certain appliances, carpeting, furniture, land improvements, and equipment may fall into different asset classes.
Repairs vs. Improvements
Not every property expenditure is treated the same way.
Some qualifying repair and maintenance expenditures may be currently deductible, while improvements may need to be capitalized and depreciated.
That distinction can significantly affect taxable income.
Cost Segregation
For some properties, a cost segregation study can identify building components that qualify for shorter recovery periods than the building itself.
Whether this strategy makes sense depends on:
- Property type
- Purchase price
- Holding period
- Taxable income
- Investor objectives
- Current depreciation rules
It should be evaluated as part of the investor's broader tax strategy rather than viewed as an automatic deduction.
Depreciation Affects the Future Sale
Depreciation isn't just a current-year issue. It reduces basis, which can affect gain when the property is eventually sold.
Good planning therefore considers both:
Tax Savings Today + Tax Consequences Later
At Akato & Associates, we help investors incorporate depreciation into a broader real estate tax strategy.
This material is provided for general information only and does not constitute accounting, tax or legal advice. It does not take account of your particular circumstances. Contact the firm before acting on anything you read here.