Key Takeaways
- Depreciation is mandatory; recovery periods are 27.5 (residential), 39 (commercial), 15 (land improvements), and 5/7 (personal property).
- Cost segregation accelerates 25-35% of building basis into shorter-lived categories—breaking even at $500K+ basis.
- Bonus depreciation is phasing out from 60% (2024) to 0% (2027+)—acquisition timing is critical.
- Maximum benefit requires REPS + cost seg + 1031 exchange—the trifecta of real estate tax strategy.
This recap consolidates the depreciation structures and instruments covered in Track 1. Review the key concepts and test your understanding with the questions below.
Depreciation Framework Review
Depreciation is a mandatory non-cash deduction. Residential buildings: 27.5 years; commercial: 39 years; land improvements: 15 years; personal property: 5 or 7 years. Only the building portion is depreciable—land is excluded. The mid-month convention prorates first and last year deductions. Capital improvements start their own depreciation schedule. The partial disposition election generates additional deductions when replacing components.
Cost Segregation Review
Cost segregation reclassifies 25-35% of building components into shorter-lived categories (5, 7, 15 years). Studies cost $5,000-$15,000 and break even on properties with building basis of $500K+. Look-back studies use Section 481(a) adjustments for existing properties. Bonus depreciation amplifies cost seg benefits but is phasing out: 60% (2024), 40% (2025), 20% (2026), 0% (2027+). Section 179 allows immediate expensing up to $1,220,000 but cannot create a loss.
Strategic Considerations Review
Cost segregation generates the highest ROI when combined with REPS (to make losses non-passive) and 1031 exchanges (to defer recapture). Without REPS, accelerated depreciation may simply increase suspended passive losses. The phase-out of bonus depreciation makes acquisition timing increasingly important. Total depreciation over the holding period is unchanged—cost seg only changes the timing, but the time value of money makes that timing worth $100K+ on a $2M property.
Key Takeaways
- ✓Depreciation is mandatory; recovery periods are 27.5 (residential), 39 (commercial), 15 (land improvements), and 5/7 (personal property).
- ✓Cost segregation accelerates 25-35% of building basis into shorter-lived categories—breaking even at $500K+ basis.
- ✓Bonus depreciation is phasing out from 60% (2024) to 0% (2027+)—acquisition timing is critical.
- ✓Maximum benefit requires REPS + cost seg + 1031 exchange—the trifecta of real estate tax strategy.
Sources
Common Mistakes to Avoid
Treating depreciation as an optional deduction rather than a mandatory "allowed or allowable" requirement
Consequence: The IRS reduces basis by depreciation that should have been taken regardless of whether it was claimed—creating phantom gain upon sale with no offsetting tax benefit during ownership
Correction: Claim depreciation every year the property is in service; the "allowed or allowable" rule makes the deduction effectively mandatory
Ignoring the bonus depreciation phasedown when planning cost segregation timing
Consequence: Delaying a cost segregation study by one year reduces the bonus depreciation rate by 20 percentage points, significantly diminishing the first-year tax benefit
Correction: Evaluate cost segregation timing in light of the bonus depreciation phasedown: 60% (2024), 40% (2025), 20% (2026), 0% (2027+)
Test Your Knowledge
1.What is the standard straight-line depreciation period for a residential rental property?
2.A cost segregation study on a $2M apartment building (building basis $1.7M) identifies $510,000 in components eligible for shorter recovery periods. With 60% bonus depreciation, approximately how much additional Year 1 depreciation does the study generate compared to standard straight-line?
3.What is the bonus depreciation rate for property placed in service in 2026?