Is building components depreciation 20%?

Question

Hi folks,
As we know residential depreciation is 2.5% (cost of building/27.5) and commercial real estate depreciation is 3.6% (cost of building/39).
Is it true that components(contents, landscaping, improvements etc.) related or tied to the building have depreciation of 20% of cost of components of building.

For example:
If we purchase a residential building for 800k and 200k is land cost then building structure for depreciation equals 600k.

Further out of 600k, the total cost of components which depreciate faster may cost 50k (may be 100k or something else but I am not expert in that). So now here is our depreciation calculation :
(550k x 2.5/100) + (50k x 20/100) = 23,750

I have heard and seen many people, CPA's or tax filers don't do it.
I am really impressed with 20% components part.

Yonah Weiss · Answer

@Harpreet Singh what you're referring to is Cost Segregation (which used to be called component depreciation). It's like you're saying but a bit more complicated.

True, there are components of the property that depreciate over a faster life

5-year = Personal property (furniture, fixtures, carpeting, appliances, etc.)

15 year + Land improvements (landscaping, pavement, fencing, etc.)

BUT, according to the IRS it should be done through a quality engineering based study, otherwise known as cost segregation. Check out this link to the Cost Segregation Audit Techniques Guide

This can often bring the depreciation in the first 5 years to 20%, depending on the size and type of property.

Yes, you are also correct in saying that many CPAs and tax filers don't do it...the question is why?

Harpreet Singh · Answer

@Yonah Weiss thank you so much for clearing doubts.

Harpreet Singh · Answer

@Yonah Weiss Thank you. You even made technical terms clearer to me.

So we can't do that by ourselves but from a quality engineer. Good thing to learn about.

Can a contractor or a property inspector be that quality engineer?

Yonah Weiss · Answer

@Harpreet Singh an engineer is usually not enough, as according to the wording in the guide above. Here is a direct quote:

"Preparation By An Individual With Expertise And Experience

The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. Unfortunately, there are no prescribed qualifications for cost segregation preparers. However, a preparer’s credentials and level of expertise may have a bearing on the overall accuracy and quality of a study.In general, a study by a construction Engineer is more reliable than one conducted by someone with no engineering or construction background.  However, the possession of specific construction knowledge is not the only criterion.  Experience in cost estimating and allocation, as well as knowledge of the applicable tax law are also important criteria."