Depreciation is a wonderful thing. When done the right way, your rental real estate property bringing you income can be turned into a loss for taxes.
This strategy is probably the most commonly used with physical land and buildings, but there are many more things that can be considered, for example:
- Parking structures
- Some intangibles like patents, copyrights, and computer software
Better yet, things like the list above can be depreciated faster than land and buildings.
Accelerated depreciation should be treated as a long term tax strategy, despite the fact that many of the benefits will be coming sooner rather than later, because there is often the most gain when the property is sold.
Something to be aware of, is that part of the gain you receive might be taxed at ordinary tax rates when you sell the property… so why bother?
At the very worst, the taxes will be deferred to a later year. So you’re able to take tax savings now, and later you’ll pay them in the form of gain. Tax deferral isn’t the best strategy out there, as it only delays the inevitable BUT read on to learn how to create PERMANENT tax savings…
Using this method it’s possible to avoid any depreciation recapture. For example, buying a property with a slightly higher value in exchange for another property you own to absorb any gains you’ve collected.
Something similar, if you hold a property for the purpose of passing it onto your heirs, you won’t have to worry about losing your depreciation.
If you expect some of your depreciation to be recaptured, not all of it will be taxed as ordinary income – some will have a lower tax rate, ie. you would take the deduction at a higher rate and report it at a lower rate = permanent tax savings. To make this work in the best way possible, you have to make sure you’re in the right tax bracket now and in the future.
Buying rental properties
If you create a plan to continuously buy rental properties, you’ll have a steady stream of accelerated depreciation. This helps to compensate for your older properties that have slowed down in their depreciation abilities.
Tax depreciation schedule
The link above shows a variety of IRS depreciation tables you can use to accelerate depreciation or extend it over even 20 years. Use Form 4562 to report this on your tax return.
If you have questions about accelerated depreciation or other depreciation methods, please contact D&M Accounting and one of our tax professionals will be happy to take a look at your strategy or help you create a new one!
Learn more about how to calculate depreciation for your equipment or other assets you might have.