The Depreciation Playbook: How Real Estate Professionals Slash Their Tax Bills
Ever wonder why an investor would buy a property that doesn’t even cash flow on paper? The answer often lies in Depreciation, and especially Accelerated Depreciation. In this article, I break down how smart investors use these tools to turn a weak-looking deal into a tax-savvy win.
Depreciation lets real estate professionals deduct a property’s wear and tear over time. Utilizing cost segregation and bonus depreciation can accelerate the write-off of short-lived assets. Qualifying as a Real Estate Professional allows these deductions to offset active income, significantly reducing taxable income.
Quick cheat code before we dive deeper: Depreciation usually has to be paid back when you sell - it’s called depreciation recapture. But there are smart ways to sidestep or defer it. I won’t get into the weeds here, but if you’re curious, just email me and I’ll break it down for you.
Disclaimer
This post is for informational purposes only and does not constitute tax or legal advice. Always consult with your CPA or tax advisor for guidance specific to your situation.
What Is Depreciation and Why Does It Matter to Investors
If you invest in real estate, depreciation is one of the most powerful tools in your tax toolbox. It allows you to write off the “wear and tear” of a property over time, even if its value is increasing.
For residential rental properties, the IRS allows you to depreciate the building over 27.5 years. That means if you own a property worth $850,000 (not including land), you can deduct roughly $30,909 every year on paper.
Source: IRS Publication 946 – How to Depreciate Property
Accelerated Depreciation and Cost Segregation
Through a cost segregation study, you can break down the property into components with shorter useful lives, such as appliances, flooring, and landscaping. These may be depreciated in 5, 7, or 15 years, instead of 27.5 years.
And under current tax law (in 2025), you can take bonus depreciation on 40% of those short-life assets in the first year. This is known as accelerated depreciation, which can significantly increase your deductions.
Source: The Tax Adviser – Bonus Depreciation Phaseout and Planning
A Quick Example (for Educational Purposes Only)
Imagine you buy a $1 million rental property. After subtracting the land value, you might have $850,000 in depreciable value. A cost segregation study might classify $250,000 into short-life assets.
In 2025, you could deduct 40% of that ($100,000) immediately using bonus depreciation. If you’re a Real Estate Professional, that $100,000 can offset your active income, even if it’s from a W-2 or 1099.
As example, this strategy could help reduce taxable income from $450,000 to $245,000, resulting in over $38,000 in tax savings within a single year.
Source: IRS Real Estate Professional Status – IRC Section 469(c)(7)
Real Estate Professional (REP) Status Is the Key
To fully unlock these benefits, you (or your spouse) need to qualify as a Real Estate Professional under IRS rules:
• You spend more than 750 hours per year on real estate activities.
• More than half of your working time is in real estate trades or businesses.
Want the full breakdown of REP qualification rules?
Click here and I’ll send it your way
In your message write: REP Rules!
Source: IRS Topic No. 425 – Passive Activities – Loss Limitations
But What About Selling?
When you sell, the IRS recaptures the depreciation you took. This is called depreciation recapture, and it’s taxed at up to 25% for real estate and up to 37% for short-life assets (like those from cost segregation).
However, many investors avoid this tax hit by using a 1031 exchange, which allows you to roll all gains (including recapture) into another property, deferring taxes entirely.
Some even hold the final property until death. In that case, the heirs receive a step-up in basis, and all capital gains and recapture taxes are eliminated.
Source: IRS Instructions for Form 706 – Estate Tax
Final Thoughts
Depreciation, especially accelerated depreciation, can be a game-changer for high-income earners who invest in real estate. However, the rules are complex and frequently change. Talk to your CPA or tax advisor before making any decisions. What works for one investor may not work for another.
If you’re thinking about buying an investment property and want to understand how the numbers might look for you, I’m happy to share examples and insights.
Just a quick note—I’m not a CPA, but I’m deeply active in real estate. I help clients buy and sell homes every day, and I have a long personal track record investing in everything from commercial properties and condo conversions to home remodels and foundation replacements.
Visit SFResidential.com to schedule a one-on-one consultation. Let’s work together and find your next best step.
Frequently Asked Questions
What is depreciation, and why does it matter?
Depreciation lets you deduct a property’s “wear and tear” over 27.5 years (residential) or shorter lives via cost segregation. This write-off reduces taxable income even if your property appreciates.
How does cost segregation accelerate deductions?
Cost segregation breaks a building into short-life assets (5, 7, 15 years). In 2025, you can take bonus depreciation on 40% of those assets in year one, supercharging deductions.
Who qualifies as a Real Estate Professional?
You (or your spouse) must spend over 750 hours/year on real estate activities, and more than half of your working time must be in real estate trades or businesses.
What happens when I sell a property with depreciation?
The IRS recaptures depreciation at rates of up to 25% (for real estate) or 37% (for short-life assets). Many investors defer this tax hit by using a 1031 exchange to roll gains into another property.
Can depreciation reduce active income?
If you qualify as a Real Estate Professional, depreciation deductions—including accelerated ones—can offset active W-2 or 1099 income, significantly lowering your tax bill.
👉 Contact Oliver Burgelman today to schedule a private consultation and start your search
Oliver Burgelman
📞 415.244.5846
🌐 sfresidential.com
