Is there way for accelerated depreciation on commercial property?

Question

I recently bought a property at a higher price because of the very high rent it was getting (based on an existing lease). In four years the current lease will come to an end and the rent will go down most likely by 50% and if I want to sell the property at the time, I will most likely get 70% of my investment back. It is still worth it due to the high rent I am getting right now. Since I bought it with cash on an absolute net basis, all of my income will be taxable (less the depreciation).

My question is, is there a way I can write off a greater amount of depreciation due to the conditions I described above? Or is it a hard and fast rule with IRS that I can only write off whatever the building value is in 27.5 years? Is there a wiggle room for accelerated depreciation for special circumstances such as this?

Thank you,

Aaron Zimmerman · Answer

If it's commercial property, it's typically a 39 year useful life. What you could do is do a cost-seg study where they break the components of their buildings into various useful lives. However, that depreciation is ultimately recaptured later. I'd recommend talking to your CPA and a cost-seg expert.

Lee Ripma · Answer

@Prithvi Sri And I'll third the cost segregation study investigation with you qualified CPA who knows about real estate.

Yonah Weiss · Answer

Since everyone is recommending cost seg here @Prithvi Sri, I'll throw in my two cents as well.

While it is a great method, and I am obviously a firm believer in using the strategy, it may or may not be the right fit for you. As others said, make sure to speak with a CPA.

@Paul Moore you do not need to do a cost seg in the first year of acquisition.

Paul Moore · Answer

I’m in agreement on the cost Seg, but to my knowledge, you must do it in the year of acquisition to get the bonus depreciation available from the 2017 tax law. Good luck!

Cason Acor · Answer

I second the suggestion of looking into cost segregation.

Paul Moore · Answer

Thanks @Yonah Weiss. I was misinformed and i should have checked it out myself before commenting. I am really glad to know this!

Yonah Weiss · Answer

Happy to clarify this. To reiterate, as long as you did not elect out of it beforehand, you can elect Bonus depreciation in a future tax year, even if you filed taxes in previous years. So in your example, you can claim 100% bonus depreciation in 2021 on a property purchased in 2019, as long as you did not elect out of it in the previous tax returns. An example of electing out of bonus would be to do a regular cost segregation in the earlier years, or even breaking out and allocating certain assets to faster depreciation schedules. But if you just lumped everything together on straight-line depreciation, you can change the accounting method with a form 3115 and claim bonus depreciation in that tax year, which will catch up whatever accelerated depreciation you missed, and apply it going forward.

Logan Hartle · Answer

I would definitely consult your CPA. They should be able to provide advice.

Ultimately with the CPA will be your guiding light on this. Get with one who specializes in larger real estate transactions.

Am I understand correctly that you bought it for “x” and intend to sell it for 70% of “x”? If so you’ll likely be able to show a loss not a capital gain.

Paul Moore · Answer

@Yonah Weiss. Thanks for responding. I am sorry, I may have misspoken. I meant that the cost seg needs to be done in the TA year of acquisition in order to activate the bonus depreciation, correct? So an asset that was acquired in say 2019 could not do their cost seg study in say 2021 and then claim all of the bonus depreciation, correct? If not, I will be happy to be wrong on this! That is what we were told by a CPA, however. Thank you for your excellent comments on BP, Yonah.

Is there way for accelerated depreciation on commercial property?

Is there way for accelerated depreciation on commercial property?

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