How Accelerated Depreciation in Real Estate Cuts Your Taxes

If you’re a real estate investor, you’ve probably heard the term accelerated depreciation. But what does it really mean—and how can it help you save money on taxes and increase your cash flow?

In this article, we’ll explain accelerated depreciation in clear, simple language.

Whether you’re new to investing or own multiple rental properties, this guide will show you how this powerful tax strategy works and why it matters.

What Is Depreciation in Real Estate?

Depreciation is a tax deduction that the Internal Revenue Service (IRS) allows real estate owners to claim each year to account for wear and tear on the property.

Even though a property’s market value may rise, for tax purposes, the IRS treats the building as if it’s losing value over time. This creates a useful way to lower taxable income and improve your overall return on investment.

Related: Real Estate Depreciation: #1 Tax Strategy for Busy Professionals

Residential and Commercial Property Depreciation

Residential Rental Properties

For residential rental property, the standard depreciation schedule is 27.5 years using the straight-line depreciation method. This is commonly used by rental property owners across the United States.

Commercial Properties

Commercial property follows a 39-year recovery period. These longer periods apply to the building itself, not the land, which is not depreciable.

Commercial real estate investors often benefit more from accelerated depreciation real estate strategies because their properties include more components that qualify for shorter depreciation periods.

What Is Accelerated Depreciation?

The accelerated depreciation method allows property owners to take larger deductions in the first year and early years of property ownership. This is different from the straight-line method, which spreads the tax deduction evenly over the useful life of the asset.

Accelerated depreciation reduces taxable income during the initial years, which means lower income taxes and more money available for short-term reinvestment into other real estate investments.

How It Works: A Closer Look

Not all parts of real property need to follow the standard depreciation schedule. Certain components like appliances, carpeting, cabinets, and landscaping are considered tangible personal property or land improvements.

These have shorter depreciation periods, often 5, 7, or 15 years, according to the IRS depreciation rules.

The Role of a Cost Segregation Study

Many real estate owners order cost segregation studies to take advantage of accelerated depreciation real estate strategies. A cost segregation study separates a property’s purchase price into different asset categories, allowing you to depreciate certain components faster.

Specialists such as tax advisors, CPAs, or engineers analyze the cost of an asset, construction documents, and tax law to determine which parts of the property can follow shorter recovery periods under the Modified Accelerated Cost Recovery System (MACRS).

Bonus Depreciation: A Big Boost

Bonus depreciation is another tool that can supercharge your tax savings. It allows you to deduct 100% of qualified property in the first year. Thanks to the Tax Cuts and Jobs Act (Jobs Act), investors enjoyed full bonus depreciation from 2017 through 2022. This benefit is now phasing out by 20% each year and will end in 2027.

In 2025, for example, you can still deduct 60% of the value of assets like equipment, fixtures, and land improvements. This is especially beneficial for commercial property and residential rental properties with recent renovations.

Example: First-Year Accelerated Depreciation

Let’s say you buy a residential rental property for $500,000. The land value is $100,000, leaving $400,000 as the depreciable amount. A cost segregation study identifies:

    
•     

  $20,000 in appliances (5-year useful life)

      
    
•     

  $30,000 in landscaping (15-year useful life)

      
    
•     

  $350,000 building value (27.5-year depreciation schedule)

      

Using the straight-line method, you’d deduct about $14,545 each year. But with bonus depreciation and accelerated depreciation deductions, your total depreciation in year one could exceed $40,000. This creates a paper loss, reducing your taxable income and potentially your ordinary income.

Tax Benefits for Rental Property Owners

The tax benefits of accelerated depreciation in real estate are significant. In the short term, this strategy lowers your tax bill, increases your rental income cash flow, and lets you reinvest into new real estate investments sooner.

If you’re a real estate professional, you might be able to use these depreciation benefits to offset your ordinary income. For business owners and commercial real estate investors, this method offers an efficient way to reduce income taxes and increase property value over time.

Related: Pros and Cons of Being a Real Estate Professional For Tax Purposes

What Is Depreciation Recapture?

There is a downside to consider: depreciation recapture. When you sell the property, the IRS may tax the total depreciation you claimed during the years of ownership at a rate of up to 25%.

This increases your tax liability in the later years. However, you can defer this using a 1031 exchange, which helps avoid both capital gains and depreciation recapture taxes on your tax return.

Depreciation Methods Under MACRS

The IRS uses the Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation.

Straight-Line Method

This method spreads depreciation evenly across the number of years in the asset’s useful life. It’s often used for residential properties and provides a consistent annual deduction.

Double-Declining Balance

This method front-loads depreciation expenses in the earlier years. It is useful when seeking higher tax savings in the short term.

Sum-of-the-Years-Digits

This method also results in larger deductions in the earlier years and smaller ones in subsequent years. It offers a middle ground between the other two methods.

Each method supports different tax strategy goals depending on whether you’re aiming for short-term relief or long-term planning.

Mistakes to Avoid

Never include land value in your depreciation calculation—land is not depreciable. Also, skipping a cost segregation study could mean missing out on accelerated depreciation real estate tax benefits.

Don’t forget to adjust your depreciation schedule when you make capital improvements, and always seek legal advice from a tax advisor to comply with the Internal Revenue Code.

How to Get Started with Accelerated Depreciation Real Estate Planning

If you’re new to rental property depreciation, start by speaking with a tax advisor who understands MACRS and cost segregation studies. You’ll need to know the purchase price, cost basis, and whether any capital improvements have been made to determine total depreciation potential.

Be sure to also assess your real estate investments to identify qualified property with a useful life under 20 years—these are prime candidates for accelerated depreciation deductions.

Final Thoughts

Accelerated depreciation in real estate is a good idea for real estate professionals, business owners, and rental property owners looking to increase cash flow and reduce income taxes. It offers short-term tax savings and long-term benefits through smart use of depreciation methods and bonus depreciation.

By working with a qualified tax advisor and performing a cost segregation study, you can take full advantage of the tax benefits offered by accelerated depreciation. This strategy is one of the most effective ways to lower your tax bill and grow your portfolio in the United States real estate market.

Whether you’re in your first year of ownership or planning for future tax years, don’t overlook the value of this powerful tool. The right approach to accelerated depreciation real estate planning can lead to significant change in your financial future.