It’s common to break out land and building in a rental property for depreciation purposes, but there are many more components to consider. These additional components may include appliances, parking structures, landscaping, furniture, fixtures, and much more. Most importantly, these additional components can be depreciated much faster than land and building.
The result is accelerated depreciation which means more depreciation can be taken sooner.
Keep this in mind: Accelerated depreciation is a long term strategy
The decision to accelerate depreciation should be part of a long term tax strategy. While the tax benefits can come immediately, there needs to be a focus on the future to truly maximize the benefits.
Accelerated depreciation often results in more gain when the property is sold.
On top of that, the depreciation taken may be recaptured when the property is sold which means a portion of the gain (the portion attributable to the depreciation) may be taxed at ordinary tax rates.
So how is any of this good news for accelerated depreciation?
Here’s how. The worst case scenario with accelerated depreciation is that the tax is deferred to a later year. You take the bigger deductions now, enjoy the tax savings now and then pay tax on it later in the form of more gain.
If you’ve heard me speak, then you probably know deferral is my least favorite type of tax planning, so you may be wondering why I think accelerated depreciation is so important in a tax strategy.
The reason is that deferral is the worst case outcome, and as far as tax planning goes, while deferral isn’t my favorite, it can still help minimize taxes. So even the worst case scenario is still good for tax planning.
But even better, there are other possible outcomes that can reduce or eliminate the future tax impact of accelerated depreciation.