What is depreciation?? What is cost segregation?

Question

Can you guys tell me what depreciation does for real estate investors?  And, what is cost segregation?  As I understand it, you are supposed to divide the building value by 27.5 years, and 39 for commercial real estate.  I'm not sure why we do this, or how this helps real estate investors.  I think it is taxes that are taken away when you sell the property, just for holding it??

Taylor L. · Answer

Depreciation is basically a paper loss that goes against your actual income. Your property has a finite useable life, and fortunately the tax code allows us to account for that and subtract that value. As you've identified, that useful life is put on a schedule.

There are portions of properties which have even shorter depreciation schedules, meaning we get to depreciate their value more quickly. Instead of subtracting a certain item's value over 27.5 years, for some things that schedule is as short as 5 years. So we get to recognize those paper losses more quickly.

Cost segregation is when we hire a 3rd party to come in and do an engineering study telling us how much we can depreciate at a more rapid rate than 27.5 years. That way we get to realize some of our depreciation losses faster.

I'm not a CPA or a cost seg expert. Just an investor who has been involved in several such deals.

Basit Siddiqi · Answer

Depreciation - An annual expense on an asset that provides value/benefits over 1 year.If you purchase a renal property, the rental property will be depreciated over a period of time instead of written off in year 1.Cost Segregation - Analyzes a property and tries to determine if there are components within a property purchase that is eligible for faster depreciation.

Julio Gonzalez · Answer

@Aaryan Patel Great question! Here are some articles that I've written that explain cost segregation more thoroughly - what types of assets are depreciated at a shorter useful life, added benefits of cost segregation, etc.

https://www.biggerpockets.com/...

Michael Plaks · Answer

@Aaryan Patel

Depreciation is an accounting method to write off the cost of purchasing a property over many years. Why we do this? Because it's the tax law. You cannot write off the whole property when you buy it. When you sell the property, you "recapture" depreciation. Here is a good introduction: https://www.biggerpockets.com/...

Cost segregation is a method of taking more depreciation upfront. Sometimes it works very well, and sometimes it's pointless. Depends on your personal situation.

What is depreciation?? What is cost segregation?

Most Popular Reply