Is Forcing Depreciation a thing?

Question

So I was recently on the hunt for a new CPA, one that focused on Real Estate strategies. One interesting strategy he mentioned that really stuck out to me was "forcing depreciation". He didn't elaborate too much on this but I honestly cannot stop thinking about it (if it's true).

To my understanding, it's basically when an assessment is done on the property by a professional and determines the entire value of the depreciation remaining on the property. Which will then allow you take a lump sum (forcing the depreciation) for the remaining years instead.

Has anyone ever heard of this?

Bernard Reisz · Answer

@Carlos Bello I think @Yonah Weiss provided helpful info and I'll just expand a bit on his post.

• Capital assets that have a finite "tax life" are depreciated over that IRS-determined tax life. This is also referred to as "cost recovery."
• "Depreciation/Cost Recovery" means that each year the asset is in use, you get a tax deduction for a portion of your investment in the asset.
• When such property is sold at a gain, you are taxed at lower capital gains tax rates. However, to the extent depreciation deductions were claimed - or should have been claimed (they're not optional) - you're taxed at slightly higher rate of 25% on "depreciation recapture."
• Residential & Commercial real estate have some of the longest "tax lives," resulting in lower annual depreciation deductions than you would get for non-real estate property
• Through a cost segregation study, you can "reclassify" items that would otherwise be treated as real property to non-real property, enabling you to "accelerate" your depreciation deductions.

I've tried to avoid technical & tax code terminology in this post (to the extent possible) and hope it's helpful!

Yonah Weiss · Answer

@Carlos Bello not sure if he was referring to cost segregation, as I've never heard of that referred to as 'forcing' depreciation. What you are essentially doing is reallocating assets within the property that depreciate at faster lives. for example personal property (appliances, furniture, fixtures, carpeting, etc.) depreciates over 5 years, and land improvements (pavement, landscaping, fencing, etc.) over 15 years. You can take all of that depreciation over the shorter lives, or even take it all up front in the first year with 100% bonus depreciation.

What you said:He also stated that whatever funds I received from the accelerated depreciation, I would have to pay only remaining years of the depreciation if I ever sold the property.

That's not accurate, unless you you do a 1031 exchange. But it looks like he was throwing a lot at you without really explaining too much. There are a lot of missing parts over here.

Yonah Weiss · Answer

@Carlos Bello Perhaps he was referring to forced appreciation, which is defiantly a thing. It involves raising rents, lowering operating costs, adding amenities, etc. which all add value to the property at a faster rate than natural appreciation.

Depreciation, is a tax deduction based on the purchase price, and cannot be forced. Portions of it can be accelerated, but I don't think that's what this CPA was referring to...at least I hope not.

It's always best to ask questions, so thank you for bringing this up here. That's how we all learn.

Daniel Hyman · Answer

@Carlos Bello

You can learn a ton of great info by following the posts of many on this thread. If you are looking for unique tax strategies, @Yonah Weiss and @Bernard Reisz are two of the best in the business.

Brian Van Pelt · Answer

@Carlos BelloI agree with the others and will add, It may be time to get another CPA. Accounting is boring , tedious and exact. THere are very little 'secrets' in accounting, and the reason most accounting firms don't use 'creative' financing is because when the IRS decides to become involved (like in ruling that you CAN'T force depreciation) it becomes very expensive for their client's to unwind years of Tax Returns and pay the fines. Stick to boring and tedious Accounting. Leave the creative financing to people like Bernie Madoff.

Carlos Bello · Answer

Thank you guys for taking the time to respond. It was definitely a lot of information shared that day with very little elaboration. I have to say I am loving the BP community!

Russell Brazil · Answer

Sounds like he is referring to a cost segregation analysis.

Carlos Bello · Answer

thank you! @Daniel Hyman

Nicholas Myler · Answer

I agree with others and add that it may be time to get another CPA. There is almost no “secret” in accounting, and most accounting firms do not use “creative” financing because it becomes very expensive when the US Internal Revenue Service decides to participate. Their clients have to issue years of tax returns and Pay a fine.

Carlos Bello · Answer

@Russell Brazil This could be the case. He also stated that whatever funds I received from the accelerated depreciation, I would have to pay only remaining years of the depreciation if I ever sold the property.

Is Forcing Depreciation a thing?

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