Owning investment property isn't only about rental income and potential appreciation.
There can also be important tax considerations associated with owning real estate, including depreciation.
And recent changes to federal tax law have brought renewed attention to 100% bonus depreciation for certain qualifying property.
If you own investment real estate or are considering purchasing it, understanding the basics can help you know what questions to discuss with your CPA or tax advisor.
Depreciation allows an owner to recover the cost of certain income-producing property through deductions over time.
For residential rental property, the building generally has a 27.5-year recovery period under the IRS's General Depreciation System. Land itself generally cannot be depreciated. IRS
For example, imagine an investment property is purchased for $1 million and $200,000 of the property's basis is allocated to land.
Because land isn't depreciable, the portion attributable to the building and other eligible improvements would be considered separately when determining depreciation.
The actual calculation depends on several factors, including the property's tax basis, when it was placed in service, and the applicable depreciation method. IRS
Your tax professional should determine the appropriate treatment for your individual property.
Depreciation can potentially reduce the taxable income generated by an investment property.
The property itself doesn't necessarily have to be declining in market value for an owner to claim depreciation.
That's an important distinction.
A rental property might increase in market value over time while its owner may still be able to take allowable depreciation deductions for tax purposes.
However, depreciation can also affect the tax calculation when the property is eventually sold, including potential depreciation recapture.
That's one reason depreciation shouldn't be viewed in isolation. A qualified tax professional can help evaluate both the current and longer-term implications.
This is where the topic becomes especially timely.
Current federal law restored 100% bonus depreciation for certain qualified property acquired and placed in service after January 19, 2025.IRS
That does not mean an investor can simply deduct 100% of the cost of a residential rental building.
Generally, qualifying property for this provision includes certain depreciable property with a recovery period of 20 years or less, along with other specifically qualifying property. IRS
For a real estate investor, that distinction is important.
Certain components or improvements associated with an investment property may potentially qualify for shorter depreciation periods and, depending on the circumstances, bonus depreciation.
Some real estate investors use a cost segregation study to identify components of a property that may qualify for shorter depreciation periods rather than treating the entire depreciable property as one building.
For example, certain qualifying property may fall into 5-, 7-, or 15-year recovery periods rather than the 27.5-year period generally used for residential rental buildings.
With 100% bonus depreciation available for certain qualified property, identifying those components can potentially accelerate deductions.
But cost segregation is a specialized tax strategy.
Whether it makes sense depends on the property, the investor's tax situation, how long the property may be held, and other factors.
This is something to evaluate with a qualified CPA or tax professional.
Not every improvement to an investment property receives the same tax treatment.
Some property with a recovery period of 20 years or less may qualify for the 100% special depreciation allowance when the applicable requirements are met. IRS
Other improvements may need to be depreciated over a longer period.
This is another reason it's important not to assume that every renovation, roof, HVAC system, appliance, or other investment-property expense receives the same treatment.
The specifics matter.
Tax treatment shouldn't be the only reason to purchase an investment property.
But it can be an important part of understanding the property's overall financial picture.
Before purchasing, investors may want to consider the financing, anticipated rental income, ongoing expenses, available cash reserves, and potential tax treatment together.
Your mortgage professional can help you understand the financing side.
Your CPA or tax advisor can help you determine which depreciation rules may apply and whether strategies such as bonus depreciation or cost segregation make sense for your situation.
Depreciation can be an important benefit of owning investment real estate, and recent federal tax changes have restored 100% bonus depreciation for certain qualifying property acquired and placed in service after January 19, 2025.IRS
But the rules are specific, and 100% bonus depreciation does not mean the entire cost of an investment property can automatically be deducted immediately.
If you're considering purchasing investment real estate in California, understanding both the mortgage strategy and the potential tax considerations can help you have better conversations with the professionals advising you.
Janice Nugent is a Certified Mortgage Planning Specialist (CMPS®) and Certified Divorce Lending Professional (CDLP®) who helps California homebuyers, homeowners, and real estate investors understand how mortgage financing fits into their broader financial picture.
Janice works with clients and their professional advisors throughout California to evaluate mortgage strategies before important real estate and financing decisions are made.
Janice provides mortgage planning and lending guidance and does not provide legal, tax, investment, or financial planning advice. Clients should consult the appropriate licensed professionals regarding those matters.
📩 Janice@JaniceNugent.com
☎ 925-683-0787
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