Segmented Depreciation

To understand the value and beauty of it, let's take a look at what depreciation is.

In accounting, you can write off a certain amount of depreciation as a cost or loss. You see, the IRS looks at your assets as "wearing out" and becoming less valuable over time.

For example, if you own a freight company you can depreciate your trucks because they are wearing out and becoming less valuable. It may be a non-cash expense year to year, but someday you will have to replace those trucks.

As we look at our rental property tax deductions, segmented depreciation or cost segregation as some accountants call it can work greatly in our favor.

You see, the beauty of segmented depreciation of rental property when it comes to real estate investing is that more than likely our properties are actually going up in value!

For years real estate investors put their properties on a 27.5 straight-line depreciation schedule.

But in reality you may have some assets attached to that property that will not last anywhere near 27.5 years. Instead, you can depreciate them sooner such as 5 or 15 years.

Here's an example:

You own a duplex that is valued at $250,000. You could put it on a straight 27.5 year depreciation schedule or you could segregate your shorter lived assets.

If you choose to segregate and do segmented depreciation, you could depreciate $190,000 over 27.5 years and depreciate $40,000 over 5 years, and $20,000 over 15 years (for example).

• 5 year assets are typically things such as carpets, appliances, drapes, etc.
• 15 year assets are things such as fences, driveways, patios, etc.

Which method is better - segmented or straight line? Let's take a look.

If you choose to depreciate the $250,000 over 27.5 years you will have an annual depreciation of $9,091.

If you choose segmented, your annual depreciation would be $16,242 !!!

You might have figured out though that the $40,000 in 5 year assets will be phased out after 5 years and the $20,000 in 15 year assets will phase out in 15 years.

Yes, that is true, but the reality is that you will be replacing those assets anyway which starts the cycle over again. You will more than likely have to replace the carpets after 5 years in a rental.

So in most situations, it is far worth it to do segment your depreciation.

As always, ASK YOUR ACCOUNTANT BEFORE DOING ANYTHING!!!

Return from Segmented Depreciation to Straight Up Real Estate Investing