The Smart Real Estate Depreciation Deduction

This is the real tax loophole for real estate investors. Depreciation is a phantom expense. It doesn’t cost you any cash, but you get a deduction. It doesn’t get much better than that.

First thing to determine before you start maximizing depreciation is to calculate whether you should. If you already have a loss or extra depreciation will push you into a loss, will you be able to take advantage of that loss?

This brings up the bigger question of real estate losses and deductibility. We’ll go into this in more detail in the next article, but for now just remember:

If you make less then $100K in adjusted gross income and have active participation, you can deduct up to $25,000 in real estate losses against other income.

If you make more than $150K in adjusted gross income, you can’t deduct anything.

Between $100K and $150K, the deduction phases out.

There is an exception: Real Estate Professional with material participation. But before you jump into this, make sure you are up to date on the latest IRS issues with Real Estate Professionals.

Now, assuming you can take a deduction for the real estate losses, or extra depreciation reduces a profit, let’s talk about how to maximize your depreciation.

The easy way to depreciation real estate is to make two decisions: (1) Is it commercial or residential? (2) How much do you allocate to land?

Land is not depreciable in any case. Commercial real property is generally depreciated over 39 years while residential is depreciated over 27.5 years.

But every property has a part of it that is depreciated over 5 – 18 years. That would include furnace, A/C, garbage disposals, floor coverings, paving, and a whole lot of things.

To determine how much is allocable to each item, use a cost segregation study. These are all things an experienced real estate tax CPA can help you with.

Give us a call if you are ready to put decades of work and personal investing and tax experience on your side. We are investors. And we’re CPAs. Find out how affordable our tax services can be. Give Richard a call at 888.592.4769.

Don’t Miss Our Tips Archive! Click Here