Rapid Depreciation On Building - By Kelly J. Bullis, CPA
Updated: Feb 13
Owning Real Estate is a great long-term investment idea. It’s just about the only investment that you get to write off part of the cost every year rather than waiting until you sell it. Currently, it usually takes 39 years to get to write off the entire cost (other than land). For most of us, that is longer than we will live.
So, how do you speed that up? Glad you asked. It takes a little bit of work, but it’s worth it! Step One is to have a “Cost-Segregation Study” done on the property. You can go to the website www.ascsp.org to find a professional who will do this. It is important to document this properly to avoid an IRS challenge. Be prepared, this report is usually not low-cost. The good news is that you can write off the cost of the report in the year you pay for it. (Even better, when you purchase a property, just have the allocation of components identified in the sales agreement, then you probably won’t even need a Cost-Segregation Study.)
Step Two, begin rapidly depreciating many of the various parts of your building identified in the Cost-Segregation Study that qualify for shorter periods. The IRS will be watching, but they will not require any special notification of an accounting change or anything like that. Just expand your depreciation schedule to break out all the components that can be depreciated faster.
Examples of faster depreciation write-off items might be…Wall-Coverings (write off over 5 years); Carpets (write off over 5 years); Accent Lighting (write off over 7 years); Portions of the Electrical System (write off over 5 years); Kitchen electrical and plumbing (write off over 5 years); Roof (write off over 15 years); Exterior Site Improvements such as sidewalks and landscaping (write off over 15 years); Parking Lot (write off over 15 years); etc.
Does this really save money? Suppose you are able to move $100,000 from 39-year depreciation life to 5-year. Assuming a 5% discount rate (reverse interest charge) and you are in the top tax rate (39%), it will save about $16,000 in what we accountants like to call “net-present-value savings.” Perhaps you own a multi-family apartment complex that cost you $1,000,000 and you are able to segregate $300,000 of that into rapidly depreciating segments, that could be like putting $48,000 in your pockets spread out over 5 years.
There is a catch. Isn’t there always a catch? If you sell the property before you die, you have to recapture any depreciation taken as ordinary income, not capital gain. But, if you do not sell it and it is passed to your heirs at your death, there is NO depreciation recapture! I love that part! Yes, if you hold this asset till your death, you get to write off much of the cost during your life-time, saving tax, then at your death the amount you wrote off is wiped off. Your heirs get to start all over again, using the current fair market value to depreciate the property all over again.
Did you hear? Prov 21:5a “The plans of the diligent lead surely to advantage…”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.