Is Accelerated Depreciation on Real Estate Worth the Cost?

Investing in real estate is a uniquely lucrative venture because of the many common tax benefits that relate to real estate.

Real estate investment especially stands out when you compare it to other types of investments because of the possibility of depreciating the actual property. Naturally, there are other tax deductions as well, but property depreciation is more lucrative as it is a form of cost segregation, which essentially enables you to keep a lot of the capital you spend on investments.

What Is Accelerated Depreciation?

In general, depreciation in real estate investing is used to save capital over time because property losses value from usage, obsolescence, wear, and tear. You keep it by writing off the costs you have for property improvements you have to make as time passes. 

If you own an apartment or some other residential building, you can write off a lot of the money you spend on improvements, over 27.5 years. The same can be done for commercial real estate, except here, the period is 39 years.

However, you can only depreciate the building and not the land – which never loses its value.

Additionally, the real benefit here would be to depreciate your property faster than the previously mentioned time-frames. 

You can do that with the process of accelerated depreciation. The way it works is that even though the actual building can last for 27.5 or 39 years, you can’t say the same for specific parts of it – like windows, doors, the roof, etc. 

As every building has many such parts that don’t last as long as the building itself, you can potentially save a lot more than you can on regular property depreciation. 

Naturally, you can’t know how much you can save until you order an accelerated depreciation study – more commonly known as cost segregation study. 

Is Accelerated Depreciation Worth It?

The first thing that probably comes to mind when thinking about the benefits of accelerated depreciation:

Is accelerated depreciation worth it?

You have to take into account that a study you need to conduct costs money and that it has to be done by a professional as accelerated depreciation requires paperwork that can back your claims for depreciation. 

It’s hard to determine the real numbers as each property costs differently, and each part depreciates separately as well, but in every case, you are likely to save tens of thousands every year for several years on tax benefits, compared to the few thousand dollars a cost segregation study would cost.

Whichever way you look at it, with the gains you get from accelerated depreciation, the costs of the study are quickly paid off within a year, at the most. The money you gain afterward is pure profit.

Naturally, it’s still up to you to check if the same thing can happen in your case, which is why you should always check with the proper professionals who can tell you if the study will be worth it before you decide to go ahead with it. These appraisers can quickly and easily determine the feasibility of the study, so you’ll soon find out if accelerated depreciation is worth the cost.