Can anyone explain accelerated depreciation and when to use it?

[Zach Lemaster]

Can anyone explain accelerated depreciation and when to use it?  Any other awesome tax benefits to discuss?

[Jaysen Medhurst]

@Zach Lemaster, instead of depreciating everything in a property on the same schedule (27.5 years for residential, 39 years) you determine the usable life of the different components and then depreciate them according to those schedules.

For example, if you have $2750 worth of carpets in a property that's $100/year of depreciation for 27.5 years. But the useful life of carpet may only be 7 years (I'm making that up). So you depreciate it over 7 years and take ~$393 of depreciation per year.

What this effectively does is capture most of the depreciation much sooner and reduces your tax liability (against cash flow). This is especially useful if you know that you only plan to hold a property for 10 years say. You would never "get" the other 17.5 years of depreciation.

Here's the rub, though (there are 2 actually). In order to do this you have to get a "cost segregation study" professionally done. This is basically paying a specialized accounting firm to figure out the value and depreciation schedule of all the little parts of the property. As you can imagine, this isn't cheap. That's why it generally doesn't make sense to do on a property with a value less than $750k.

The other downside is that by accelerating the depreciation you've lowered the cost basis for the purposes of taxes when you sell. If you buy a place for $1MM, take $200k of depreciation and then sell for $1.5MM, the IRS considers you as having made $700k, not $500k. One more reason to do a 1031 exchange.

As far as other tax benefits, don't over look QBI and the fact that rental income isn't subject to social security or medicare taxes. When taken together with depreciation, $1 of rental income can replace $1.25+ of regular income due to the tax benefits.