Accelerated depreciation

A method for calculating the depreciation of income-producing assets at a faster pace than the straight-line method would allow. Any depreciation claimed in excess of the amount that could be claimed using the straight-line method is recaptured as ordinary income to the extent of the sale's gain.

Accelerated depreciation is a tax strategy that allows real estate investors to deduct the cost of property at a faster rate than standard straight-line depreciation. This approach front-loads depreciation deductions in the earlier years of asset ownership, reducing taxable income during these initial periods.

Modified Accelerated Cost Recovery System (MACRS)

The standard method for most real property acquired after 1986, allowing residential rental properties to be depreciated over 27.5 years and commercial properties over 39 years.

Cost Segregation

An engineering-based approach that identifies and reclassifies building components that would typically be depreciated over 27.5 or 39 years into shorter recovery periods (5, 7, or 15 years), significantly accelerating deductions.

Bonus Depreciation

Allows for an immediate expensing of a percentage of qualified improvement property and other eligible assets, with the percentage varying based on current tax legislation.

Section 179 Deduction

Certain permits attempt the immediate expensing of certain qualified real property improvements up to the specific limits set forth.

Benefits of Accelerated Depreciation

Improved cash flow through reduced tax liability in early years of ownership
Larger tax deductions when property income and investor income may be highest
Time value of money advantage (earlier tax savings are more valuable)
Potential for strategic tax planning around other investment activities

Considerations and Limitations

Accelerated depreciation creates larger deductions initially, but these deductions diminish over time. Additionally, when the property is sold, depreciation recapture may apply at a 25% tax rate for the portion of gain attributable to depreciation deductions.