If you want to be a real estate pro, you need to understand the TERMS:

[Melanie Baldridge]

Here are a few definitions that you absolutely must know.

Bookmark this thread and use it as your cheat sheet for 2024.

Okay, let’s dive in:

Here are the terms that I’ll define in this thread:

-DEPRECIATION

-BONUS DEPRECIATION

-COST SEGREGATION

-BASIS

-LAND VALUE

-IMPROVEMENT VALUE

-3115

-RECAPTURE

DEPRECIATION:

Depreciation is the decrease in $$ value of your asset over time due to wear & tear, etc.

Standard depreciation is deducted evenly over 27.5 years for residential and 39 years for commercial.

Even w/o cost segregation you get to deduct depreciation each year.

BONUS DEPRECIATION:

This is an accelerated depreciation method. It allows a substantial portion of the asset's cost to be deducted in the first year of service.

In 2023, the bonus depreciation rate is 80%.

In 2024, it decreases to 60%.

In 2025, the rate further reduces to 40%.

COST SEGREGATION:

Cost segregation involves dividing a property into its individual components for tax purposes.

Some parts age faster, like carpets or paint.

Your CPA can use this info to more accurately depreciate elements of your property leading to potential tax savings.

BASIS:

Your basis is the initial price that you paid for your property, including any expenses or improvements.

Knowing your basis is crucial for tax purposes, as it's used to evaluate depreciation & determine the capital gains or losses if/when your property sells.

LAND VALUE:

This is how much your land is worth without any buildings or improvements.

Land doesn't get old like buildings, so you can't depreciate it. But knowing its value is key for taxes.

IMPROVEMENT VALUE:

This is the value of all the upgrades you make to your property – like a new roof or an updated kitchen.

These improvements can be depreciated, which means tax savings for you.

3115:

Filing this form can allow you to claim missed depreciation from past years.

Basically you are letting the IRS know that you are moving from the standard deduction to an accelerated deduction.

RECAPTURE:

It's payback time! If you sell your property, you will likely have to pay back some of the taxes deferred from depreciation.

Think of cost seg as an interest free loan from Uncle Sam - it comes due when you sell the property.

My motto:

Don't let industry jargon stop you from making smart financial moves!