What Is Accelerated Depreciation in Real Estate?

Depreciation is an accounting method allowing businesses to recover the cost of certain assets over their useful life. This process recognizes that assets like buildings and equipment gradually lose value through wear, tear, and obsolescence. While traditional depreciation spreads this cost evenly, “accelerated depreciation” allows for a larger portion of an asset’s cost to be deducted in its earlier years. This approach provides tax benefits to real estate investors by deferring tax liabilities into the future.

Methods of Depreciation

The fundamental distinction in depreciation lies between straight-line and accelerated methods. Straight-line depreciation allocates an asset’s cost uniformly over its useful life. This means the same amount of depreciation expense is recognized each year, providing a predictable and consistent tax deduction.

For instance, if a commercial building, excluding the land value, costs $3.9 million and has a useful life of 39 years, the annual straight-line depreciation would be $100,000 ($3,900,000 / 39 years). This fixed annual deduction reduces the property’s taxable income consistently over its recovery period. Residential rental properties, in contrast, are depreciated over 27.5 years.

Accelerated depreciation methods allow for larger deductions in the initial years of an asset’s life, with smaller deductions in later years. The total amount depreciated over the asset’s life remains consistent with straight-line methods; only the timing of deductions changes. This front-loading of deductions offers immediate tax advantages by reducing taxable income more significantly in the early stages of an investment.

The rationale behind accelerated depreciation is that assets may lose more economic value early in their life. It also incentivizes businesses to invest in new assets, stimulating economic activity. By providing larger deductions sooner, these methods improve cash flow for investors.

Depreciable Real Estate Components

In real estate, understanding which components of a property are depreciable is important. Land itself is not a depreciable asset because it has an indefinite useful life. Structures and improvements on the land, such as buildings, are subject to depreciation.

Component depreciation breaks down a property into its elements. Instead of depreciating the entire building, specific components like roofing, plumbing, electrical systems, and landscaping are identified. Each component may have a different, shorter useful life compared to the main building structure.

A “cost segregation study” formalizes this process, combining accounting and engineering techniques. It identifies and reclassifies property costs from the general building structure into shorter-lived categories. For example, specialized electrical wiring, interior finishes, or site improvements like parking lots can be reclassified.

These reclassified components qualify for shorter depreciation periods, such as 5, 7, or 15 years, rather than the standard 27.5 or 39 years for the building shell. This reclassification applies accelerated depreciation methods to a significant portion of a real estate asset. Accelerating these deductions reduces taxable income and improves cash flow in the early years of property ownership.

Accelerated Depreciation Provisions

The Modified Accelerated Cost Recovery System (MACRS) is the depreciation system used for most tangible property, including real estate components. MACRS assigns specific recovery periods to different types of assets. While residential rental property has a 27.5-year recovery period and nonresidential real property has a 39-year period, many components identified through cost segregation fall into shorter MACRS recovery classes.

Shorter recovery periods (5, 7, or 15 years) allow for accelerated depreciation methods, such as the 200% declining balance method for most personal property. A larger portion of the asset’s cost is expensed in the early years. Land improvements, for example, fall into the 15-year recovery class.

Bonus depreciation allows businesses to deduct a large percentage of eligible property cost in the year it is placed in service. For qualified property acquired and placed in service after January 19, 2025, 100% bonus depreciation is reinstated. The entire cost of eligible assets, particularly those identified through cost segregation studies, can be deducted in the first year.

This provision impacts the timing of deductions, providing upfront tax savings. It applies to both new and used qualified property.

Section 179 permits businesses to deduct the full purchase price of qualifying equipment and software up to a limit in the year it is placed in service. For 2025, the maximum Section 179 deduction is $1,250,000, with a phase-out threshold beginning at $3,130,000 of purchases. While primarily for personal property, it can apply to certain real property improvements, such as qualified improvement property like roofing or HVAC systems, further accelerating deductions.

Tax Reporting and Recapture

Accelerated depreciation deductions reduce an investor’s taxable income in the early years of property ownership. This reduction translates into a lower tax liability, deferring taxes to later periods. The improved cash flow from these tax savings can be reinvested into other ventures or used to strengthen financial positions.

Depreciation recapture is a consideration when a depreciated asset is sold at a gain. This provision ensures that tax benefits from depreciation deductions are accounted for upon sale. The Internal Revenue Service (IRS) “recaptures” these benefits, meaning a portion of the gain equivalent to the depreciation taken is taxed.

For real property, this is governed by Internal Revenue Code Section 1250. When real property is sold, any gain attributable to depreciation taken is subject to a special unrecaptured gain rate, capped at 25%. This rate can be higher than the long-term capital gains rates that might apply to other portions of the gain.

If accelerated depreciation methods were used, any depreciation taken exceeding the straight-line amount can be taxed at ordinary income rates. While accelerated depreciation provides immediate tax advantages, it can lead to a larger recapture amount upon sale. This means a portion of the tax deferral is eventually paid back to the government.