depreciation deductions - tax reduction strategies

Can You Speed Up Your Depreciation Deductions?

Speed Up Your Depreciation Deductions for Residential Rental Property with Cost Segregation

If you own rental properties than you know a significant tax benefit of owning investment property is depreciation—a deduction you get without spending any additional money.

But regular depreciation for real property is slow. Residential rental property is depreciated over 27.5 years and non-residential property over 39 years, providing a relatively small deduction each year.

Cost Segregation: A Strategy to Speed Up Your Depreciation Deductions

Fortunately, there is a way you can speed up your depreciation deductions—especially during the first year or years you own the property: cost segregation.

“Cost segregation” is the technical term for separately depreciating the elements of property that are not real property. These are elements other than land, buildings, and building components. They include

  • improvements made to the land, such as landscaping, swimming pools, paved parking areas, and fences; and
  • personal property items inside a building that are not building components—for example, refrigerators, stoves, dishwashers, and carpeting in residential rentals.

Cost Segregation Does Not Increase Total Depreciation Deductions

Using cost segregation does not increase a property owner’s total depreciation deductions, but it does accelerate them over the first few years because personal property has a five- or seven-year depreciation period and land improvements a 15-year period.

In addition, by using bonus depreciation and/or Section 179 expensing, owners can deduct all or most of the cost of personal property and land improvements the first year they own the property—providing a potentially enormous first-year deduction.

A cost segregation study must be conducted to identify which building elements are personal property and land improvements and then to determine their depreciable basis. Studies can be conducted by engineers or done more cheaply with other methods that the IRS views as less reliable.

Cost segregation may not be advisable for every property owner—for example, where it results in a loss that can’t be deducted due to the passive loss rules, or where the owner intends to sell the property within a few years and has to recapture as ordinary income the cost-segregated depreciation deductions.

The best time to perform a cost segregation study is the same year you buy, build, or remodel your real property. But you can wait until a future year—perhaps when you have enough rental or other passive income to use the speeded-up depreciation deductions.

Questions About Investment Property Tax Deductions?

As an expert in small business tax services and tax consulting Ken-Mar Tax eats, sleeps and breathes small business tax strategies.  Being an enrolled agent allows founder, Ken Weinberg, to represent you to the IRS - something only a CPA, tax attorney and Enrolled Agent can do. EAs are the only federally licensed tax practitioners who specialize in taxation and also have unlimited rights to represent taxpayers before the IRS. It also means he is continuously being updated on the new IRS tax codes and taking classes from the IRS that provide guidance on how to file returns so that they are not "flagged."

When you get your taxes prepared by Ken Mar Tax you also have the option to purchase the Tax Audit Protection Plan to avoid the extra costs of paying for audit representation. If you are audited by the IRS, State of Ohio or local taxing authorities, Ken-Mar Tax will meet with the taxing authorities on your behalf to negotiate a settlement for you. The fee covers all costs up to the Appeals level, including up to 15 hours of correspondence with the auditing party – either the IRS, State of Ohio or locality.

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