Do most people still use straight-line depreciation on their rentals?

Question

I've was recently introduced to the idea of segmented depreciation, which allows me to accelerate my depreciation deductions when I separate my short life assets from the basis of my property.

Do real estate owners do this? I used to think that it required a lot of work, but I found a website that makes it really easy. I don't know anyone else that does it, unless they pay their CPA a lot of money to do it. Is it worth it to accelerate your depreciation deductions?

Answer 1

Typically, if you have to pay someone to do a cost segregation study on a residential rental worth less than $1M, the cost may exceed the benefit.

If you can separate assets yourself for free, it's definitely worth it.

I do cost segregation for my clients, but I charge a hefty fee.

For smaller clients, I refer them to a website that allows them to do it themselves, probably the same site you are referring to.

Answer 2

Not with property that provides a stable income.

If you take a large deduction in the early years, you can end up showing a capital loss. This is only beneficial when you have made other gains throughout the year, such as through the stock market or through the sale of some other property.

By using strait line depreciation, you will enjoy the same expense deduction every year. In the early years, you're allowed to deduct interest off your loan amount, which increases your expenses and lowers your income for the early years since you pay most of your interest during the early years.

If you use a double-declining balance or any kind of segmentation, you will actually find you accumulated depreciation to be very close to the book value of the asset in a fairly short amount of time. This means that in the later years, not only won't you enjoy the interest expense deduction, but you won't even have any more of your asset's expense to deduct from your annual income.

Accelerated depreciation methods are used to show breakeven, or small amount of income in the early years, until a company can get on its feet or replace the actual "old" and useless asset.

If you are using it, you are only going to hurt yourself 15 years down the line when you place your income in a higher bracket. However, if you plan to refinance your property, you will again enjoy an interest deduction. Or; if you plan to place your property in a trust fund for your heirs, expensing as much depreciation as you can now, is the smartest thing to do, since the trustees of a trust are taxed on the income of the property and not allowed to make the same deductions.

Answer 3

You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost on the tax return each year.

Three basic factors determine how much depreciation you can deduct. They are: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense.

You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.

You may have to use Form 4562 to figure and report your depreciation. See How To Report Rental Income and Expenses, later. Also see Publication 946.

Answer 4

Segmented Depreciation