What is accelerated depreciation in real estate?

Accelerated depreciation allows real estate investors to claim larger deductions for depreciation in the early years of owning a rental property, reducing their taxable income upfront.

The two most common accelerated depreciation methods used for rental properties are the double-declining balance (DDB) method and the sum-of-the-years'-digits (SYD) method.

With DDB, an asset's value is depreciated at twice the straight-line rate, resulting in higher deductions in the early years and lower deductions later on.

The SYD method frontloads depreciation by using a denominator that decreases each year, also resulting in larger write-offs initially and smaller ones over time.

Accelerated depreciation only applies to the value of the building itself, not the land.

Land is not depreciable.

Certain building components like appliances, carpeting, and landscaping can be segregated and depreciated on an accelerated schedule, separate from the overall building.

Bonus depreciation, introduced in the 2017 Tax Cuts and Jobs Act, allows businesses to deduct 100% of the cost of qualifying property in the first year, in addition to accelerated depreciation.

While accelerated depreciation provides significant near-term tax savings, it also means higher taxable income in the later years as the full depreciation is claimed.

Real estate investors must recapture any accelerated depreciation claimed when they eventually sell the property, paying taxes on that amount.

Accelerated depreciation can only be claimed on investment properties, not on a owner-occupied primary residence.

Real estate professionals often use cost segregation studies to maximize their accelerated depreciation deductions by identifying more components that can be written off faster.

The Tax Cuts and Jobs Act increased the ability to use accelerated depreciation by expanding qualifying property and increasing bonus depreciation rates.