Mastering Real Estate Depreciation – A Tax Shield You Can’t Afford to Miss 🏠
Depreciation is one of the most powerful (and misunderstood) tools in real estate investing. It allows you to legally reduce your taxable income every year — even while your property increases in value.
This blog breaks it down from a subject-matter expert lens so you can fully understand how to apply it to your portfolio.
📚 What Is Depreciation (Really)?
The IRS considers real estate to be a "wearing out" asset — like a machine. So it lets you deduct a portion of the building’s value every year, even if the building is going up in market value.
This is a non-cash deduction that reduces your taxable income without affecting your cash flow.
Translation: You can receive rental income, but show a lower (or even negative) number on your taxes.
📆 How It Works: 27.5 Years for Residential
You depreciate the building (not the land) over 27.5 years.
Example:
Purchase Price: $250,000
Land Value (per tax assessor): $50,000
Building Value = $200,000
Annual Depreciation = $200,000 / 27.5 = $7,272/year
This amount is deducted from your net income, reducing your tax bill.
💡 Bonus: Accelerated Depreciation via Cost Segregation
Cost segregation breaks the property into components (carpet, HVAC, appliances, etc.) and depreciates many of them faster — 5, 7, or 15 years.
It’s commonly used by high-level investors to generate huge paper losses early on, especially in commercial and multifamily properties.
This strategy is often paired with bonus depreciation to maximize front-end tax savings.
⚖️ Depreciation Recapture (Know This!)
If you sell the property, the IRS wants to “recapture” your depreciation and tax it at 25% — unless you defer the sale using a 1031 exchange.
That’s why many investors:
Hold long term
Refinance instead of sell
Use 1031s to roll gains forward
This lets you defer taxes indefinitely, or pass the property to heirs at a stepped-up basis (which erases depreciation recapture).
✅ Final Thoughts
Depreciation is a hidden superpower in real estate. It lets you:
Shield rental income
Boost your net cash flow
Strategically defer or eliminate taxes
Used correctly, it’s the difference between average and elite investor performance.