Accelerated Depreciation
Definition and meaning of Accelerated Depreciation in real estate.
Accelerated depreciation is an accounting and tax method that allows a property owner to deduct a larger portion of an asset's cost in the early years of its useful life rather than spreading it evenly. This approach contrasts with straight-line depreciation, which claims equal deduction amounts each year.
In more detail
In real estate investing, accelerated depreciation is often achieved through a cost segregation study, which identifies building components that can be depreciated over shorter periods, such as 5, 7, or 15 years, instead of the standard 27.5-year rental property timeline. This front-loaded deduction reduces taxable income and increases immediate cash flow, providing investors with extra capital to reinvest.
However, when the property is sold, the investor may face depreciation recapture taxes on the accelerated amounts, which are taxed at higher rates. Consequently, investors must weigh the short-term cash flow benefits against future tax liabilities. This strategy is commonly used by professional investors and real estate syndicates.
Key facts
| Category | Real Estate Investing |
|---|---|
| Common method | Cost segregation study |
| Watch out for | Depreciation recapture taxes upon the sale of the asset |
| Alternative to | Straight-line depreciation |
A real estate investor performs a cost segregation study on a commercial building, allowing them to use accelerated depreciation for the landscaping and carpeting, resulting in a large tax write-off in the first year.
Frequently asked questions
Is accelerated depreciation allowed for residential rental buildings?
The building structure itself must be depreciated using the straight-line method over 27.5 years, but specific personal property components can qualify for accelerated depreciation.
What is the benefit of accelerated depreciation?
It increases immediate cash flow by lowering taxable income in the early years of property ownership.
Related terms
Sources & references
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