Depreciation (Real Estate)

A non-cash tax deduction allowing investors to recover the cost of investment property over its useful life (27.5 years residential, 39 years commercial), reducing taxable income.

Depreciation is a powerful tax benefit allowing real estate investors to deduct the cost of their property over time, reducing taxable income without any actual cash expenditure. It's one of the key advantages of real estate over other investments. **Depreciation Schedules:** - **Residential Rental**: 27.5 years (straight-line) - **Commercial Property**: 39 years (straight-line) - **Land**: NOT depreciable **Example Calculation:** Commercial building purchase: $2,000,000 Land value: $400,000 **Depreciable basis: $1,600,000** Annual depreciation: $1,600,000 ÷ 39 = $41,026/year **Impact on NNN Investments:** On a $2M NNN property with $100,000 NOI: - Pre-depreciation taxable income: $100,000 - Less: Depreciation ($41,026) - Taxable income: $58,974 At 37% tax rate, saves ~$15,000/year in taxes **Bonus Depreciation & Cost Segregation:** A cost segregation study reclassifies building components for faster depreciation: - 5-year property: Appliances, carpeting - 7-year property: Furniture, fixtures - 15-year property: Land improvements, parking lots - 39-year: Building structure **Depreciation Recapture:** When you sell, the IRS "recaptures" depreciation at 25% federal rate. This is why many investors use 1031 exchanges to defer recapture. **Ground Lease Limitation:** Ground lease investors CANNOT depreciate because they don't own the building—only the land (which is not depreciable).

Related: 1031-exchange, depreciation-recapture, cost-segregation, noi