Normally, residential real estate gets depreciated over 27
5 years and nonresidential real estate gets depreciated over 39 years. This might mean that a $1,000,000 property which consists of an $800,000 building and a $200,000 piece of land produces $20,000 to $30,000 a year of depreciation deductions.
You can, however, use a trick called cost segregation to frontload your depreciation into the early years of ownership. And this maybe makes sense if you can match large depreciation deductions with large income amounts. Cost segregation works basically like this: An engineering firm comes out, looks at your $800,000 building, and says, “Well, another way to look at this thing is as if it’s a $500,000 building and $300,000 of fixtures and equipment.” While the $500,000 building needs to be depreciated over 27.5 or 39 years, the $300,000 of fixtures and equipment can usually be depreciated over a few years–and mostly in the very first years.
#5 De Minimis Expenditures Safe Harbor
In 2013 and 2014, the Internal Revenue Service implemented new “Tangible Property Regulations” (hereafter TPRs) which describe how to handle supplies, repairs and maintenance expenses. These new regulations provide a bunch of nifty new real estate related tax loopholes.
One such loophole, for example, is the “de minimis” safe harbor which says that if you spend $500 or less on some item, you can just deduct the item. For example, if you buy ten $500 appliances for your apartment house, you can simply write off in the year of purchase the $5,000 spent for the appliances.
#6 Routine Maintenance Safe Harbor
Another new real estate investor loophole in the new TPRs is the routine maintenance safe harbor. The routine maintenance safe harbor says if you make a repair several times during the years you owe the property, you can deduct the expenditure.
#7 Small Taxpayer Safe Harbor
The TPRs include a small taxpayer safe harbor which applies if your average income is less than $10,000,000 and your building’s unadjusted basis is $1,000,000 or less. The small taxpayer safe harbor says that if the amounts you’ve spent on repairs and maintenance for a building is less than the lesser of $10,000 or two percent of the building’s original cost, you can just deduct the repairs or maintenance.
#8 Partial Dispositions
The new TPRs also include a couple of loopholes related to disposing of a property or a chunk of a property. Here’s the first “disposition” loophole: If some improvement or repair replaces an item you’ve previously been depreciating, you can write off the rest of that old item’s undepreciated cost and also remove the accumulated depreciation from your tax return. For example, if you put on a new roof, you do need to depreciate the new roof, but with the new TPRs you get to write off whatever is left of your old roof. (This is part of the benefit and probably produces an immediate tax savings.)
Also, whatever depreciation you accumulated on the old roof, by writing off the rest of the old roof, won’t have to be “recaptured” when you later sell the property. (This is another part of the benefit and will absolutely reduce the amount of depreciation you “recapture” when you sell.)
#9 Late Dispositions
Okay, one thing that’s probably too late to do anything about now… but then again …For 2014 tax returns, you can do “late” partial dispositions for things such as roofs you’ve replaced in earlier years (in other words, before 2014).
If you were working with a good accountant, he or she probably talked with you about this. And you may have even done this. Note though that someone needs to do some semi-complicated accounting in order to show late partial dispositions on a tax return and needs to file a change in accounting method form. This is/was not a DIY project.