Straightline or double down depreciation....go...

[Dave S.]

Who does what and what are the pros and cons?

[Michael Plaks]

@Dave S.

"Double down" is not really the term. You must be referring to the 200% declining balance depreciation which is one of the many methods of accelerated depreciation. Some pointers for starters:

1. Real property itself (buildings) can only use straight line depreciation.

2. Other property such as land improvements (fences, driveways, landscaping), personal property (appliances, carpets, removable cabinetry) etc. can use either straight line or one of the accelerated methods, including sometimes 100% upfront.

3. Cost segregation aka asset segregation is a strategy of separating the items mentioned in #2 above from the real property, in order to create opportunities for accelerated depreciation and increase the total depreciation deduction.

4. Pros of accelerated depreciation: bigger depreciation deduction and therefore less taxes in the early years.

5. Cons of accelerated depreciation:

• sometimes your ability to deduct depreciation is limited, so there're no extra savings
• depreciation deductions get smaller in the later years, because you're basically front-loading on them
• it takes additional work and, if you hire professionals for the cost segregation - extra cost
• all depreciation eventually has to be recaptured (returned to the IRS), increasing taxes when you sell
• if you do a 1031 exchange to delay taxes upon sale - cost segregation makes 1031s more complicated
• more complicated tax returns in general

6. There are some higher-level tax planning considerations that compare differences from year to year, impact of one-time tax events, changes in the tax law etc.