Rental Property & Investment Residential Real Estate Depreciation (2024)

Investment Residential Real Estate and Rental Property Depreciation

Investment residential real estate has a very different purpose and function when compared with commercial property. While the commercial property is by definition intended for business purposes, investment residential property includes single-family residences, duplexes or multi-family apartment buildings leased to tenants through rental agreements that specify move-in dates over an agreed time period.

What Every Residential Real Estate Investor Needs to Know

Do you own one of these types of residential rental properties mentioned above? Have you taken advantage of the Internal Revenue Service’s (IRS) allowed tax savings opportunity available to investment residential property owners? Every residential investor needs to know you can increase cash flow by accelerating the depreciable lives of certain components of a residential home, duplex or multifamily building.

Residential Property Depreciation

Most commercial properties are depreciated over 39 years, straight-line, but residential properties can be depreciated over 27.5 years straight-line as dictated by the current U.S. Tax Code. However, certain building components, as well as certain land improvements, qualify for shorter depreciable lives. The IRS allows building owners the opportunity under the Modified Accelerated Cost Recovery System (MACRS) to depreciate certain land improvements over 15 years at 150% declining balance (DB) and personal property over 5 years at 200% DB. This depreciation analysis is known as a Cost Segregation (CS) study.

For example, the plumbing costs associated with installing a 3/4″ copper pipe connected to a bathroom sink in your rental property must be depreciated over 27.5 years. That same 3/4″ pipe installed to a kitchen dishwasher qualifies as a 5-year write-off. The bathroom sink is related to the operation of the building, while the dishwasher is related to the taxpayers business of rental properties. Your rental property has both types of assets in it, and what you need as a real estate owner/investor is someone who can help you segregate the costs of your rental property into 27.5, 15 and 5-year depreciable lives.

Not only can you depreciate your rental property faster, if you replace an asset of your property, (like a roof, HVAC unit, etc.), recent tax legislation known as the Tangible Property Regulations (TPR) allow building owners to dispose of assets as they’re replaced. This is another reason to have a qualified CS provider like McGuire Sponsel to perform your study.

Take Advantage of IRS Allowed Tax Benefits to Owners of Residential Rental Properties Utilizing a Cost Segregation Study

The only way to have these components segregated is to have a detailed engineering-based CS study performed on your property. Our professionals possess over 150 years of combined CS experience and have completed over 18,000 studies for hundreds of CPA firm clients and commercial property owners across the country using the engineering approach to CS, which includes a detailed engineering-based final report and work paper documentation that has survived IRS audits for nearly 25 years. We take the time to discuss any questions you may have about residential real estate depreciation before providing our proposal.

A GIFT FROM THE IRS: The IRS allows current building owners to go back as far as 1986 (if they still own the property) and “catch up” on the depreciation they should have been deducting from the day the property was placed in service WITHOUT AMENDING PRIOR TAX RETURNS. All of the additional depreciation found as a result of our detailed engineering-based approach is taken in the year of the election.

To discover how E&M, now McGuire Sponsel, can help you with accelerating the depreciation on your residential properties complete the free estimate tool for your property.

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