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What Is the IRS Depreciation Schedule for Commercial Real Estate? by Steve Lander
Commercial real estate is an asset qualifying for depreciation. It cannot be expensed as an ordinary method of write-off. However, in 2011, the US Congress passed legislation that allowed for 100% bonus depreciation on commercial real estate. In effect, this allowed for full expensing of the commercial real estate as an asset.
One way to accelerate your depreciation is through cost segregation. This allows you to reclassify your building into it’s individual building components, some of which have a life that is much shorter than 40 years. For example, if your building has a computerized security system, you could depreciate the computers in the security system over a five-year period. This moves a lot of your depreciation to the front of the depreciation schedule — earlier in your ownership of the building — and saves you money in the beginning. No doubt you have heard your CPA mention “time-value of money”! But by taking more depreciation up front, you have less depreciation to claim in the future. Of course, the dollar is worth more today than tomorrow, so that’s fine.
Because commercial real estate is considered an asset rather than an expense, the Internal Revenue Service won’t let you write off its cost in the year you buy it. Instead, the agency requires you to decrease its value every year by a small amount to simulate its gradual loss of value as it deteriorates. This process is called depreciation. Most commercial buildings have a 39-year life, although you can speed up the process and claim your depreciation in less time.
Commercial Buildings and Land
Commercial buildings are depreciated over 39 years. Commercial land, on the other hand, is not depreciable, because the IRS looks at land as something that doesn’t deteriorate over time. Since you usually buy buildings and land together, you will need to allocate the value that you pay for the property between the building and land. It’s best to get an accountant’s advice on how to do this in a way that both maximizes your depreciation while also being able to pass muster with the IRS. If you make improvements to land so you can place a building on it, those improvements are depreciable over 15 years.
When you build out space for a tenant, the IRS lets you depreciate those “leasehold improvements” over 15 years instead of 39 years. This is because you usually have to undo and redo leasehold improvements every time a tenant moves out, so the improvements don’t last as long as your building. The improvements must be completely inside the tenant space and should be nonstructural. In addition to the accelerated 15-year depreciation, you can write off the entire balance of the leasehold improvements in one lump sum if the tenant moves out before the end of the 15 years. The 15-year timetable has been a part of the law since 2004 but requires periodic congressional approval. Confirm with your accountant to ensure the timetable is still in effect.
One way to accelerate your depreciation is through cost segregation. This allows you to divide your building into all of its constituent systems, some of which have a life that is much shorter than 30 years. For instance, if your building has a computerized security system, you could write off the computers in the security system over a five-year period. This moves a lot of your depreciation to the front of the depreciation schedule — earlier in your ownership of the building — and saves you money in the beginning. But by taking more depreciation up front, you have less depreciation to claim in the future.
Depreciation and Taxes
Depreciation offsets income from your rental property on a dollar-for-dollar basis. For example, if you have $100,000 of income and $30,000 in depreciation, your taxable income becomes $70,000. If you’re paying a 33 percent marginal tax rate, that would reduce your tax liability by $10,000. However, if you sell your building for more than its cost minus all the depreciation you claimed, the IRS will see that the building didn’t really lose value like it was supposed to based on your depreciation. In that instance, the agency would charge you a depreciation recapture tax, also known as a section 1250 tax, of 25 percent. Taking the above example, if you claimed $30,000 depreciation and the building that you bought for $1 million sold for $1 million, the IRS would charge $7,500 in depreciation recapture tax when you sell.
Phoenix Commercial Real Estate and Investment Real Estate: Investors and Owner / Users need to really know the market today before making a move in owner user Commercial Properties, Investment Properties and land in Phoenix / Maricopa County, Pinal County / Arizona, as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial Properties and Investment Properties. I am marketing my listings on Costar, Loop-net CCIM, Kasten Long Commercial Group. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also internationalClick here to find out what is a CCIM: https://en.wikipedia.org/wiki/CCIM
Please call or text me on my cell: 520-975-5207 or send me an e-mail firstname.lastname@example.org
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
- The average age of the population is 34 years old.
- The health cost index score in this area is 102.1. (100 = national average)
- Here are some of the distributions of commute times for the area: <15 min (22.7%), 15-29 min (36.8%), 30-44 min (25.1%), 45-59 min (8.6%), >60 min (6.8%).
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Kasten Long Commercial Group tracks all advertised apartment communities, including those advertised by other brokerages. The interactive map shows the location of each community (10+ units) and each location is color coded by the size (number of total units).
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
Please reply by e-mail email@example.com or call me on my cell 520-975-5207
Walter Unger CCIM
Senior Associate Broker
Kasten Long Commercial Group
5110 N 40th Street, Suite 110
Phoenix , AZ 85018
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The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.