Depreciation Is A Loan

Accountant · West Jordan, UT · Member since 2017 · 182 posts · 95 votes

I just came from LinkedIn. If you have access, I'm recommending a post: Matt Hamilton, CPA .
His graphic, hand-drawn: DEPRECIATION IS A LOAN.
Massive re-frame.

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

3mo

@Julius Vincent

Using that very same logic, a loan can be replaced by another loan, and borrowing carries the same "time value of money" benefit. So the analogy [depreciation = loan] remains near perfect, colleague. :)

As to your "math still favors you" - I'd replace it with "math might favor you." If we change the assumptions you made, it could work in the opposite direction.

Why can't we all agree that cost segregation could be wonderful but not always so?

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Joseph CacciapagliaBusiness Member
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
3mo
It's a loan that you never have to pay back unless you sell, can instead transfer to a new property with a 1031 exchange, and gets wiped out for your heirs due to stepped up basis.
That said, depreciation recapture is certainly something investors should consider.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3mo
I have been using this analogy DEPRECIATION = LOAN forever :)

https://www.biggerpockets.com/forums/51/topics/1121063-expla...
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Julius VincentBusiness Member
Tax Strategist | CPA, MBA + Wharton FP&A | CFO-Level Planning · Houston, TX · Member since 2025 · 157 posts · 172 votes
3mo
I'd push back on the "loan" framing a bit. A loan has to be paid back. Depreciation only triggers recapture if you sell, and there are two clean ways to never pay it. A 1031 rolls the gain and recapture into the next property, as long as you want. Hold till death and your heirs get a stepped-up basis that wipes it out completely. Swap till you drop.

And even if you do pay it back, the math still favors you. You save at your ordinary rate (35-37% for a lot of us), but unrecaptured depreciation on the building caps at 25%. That spread is permanent.

Plus timing matters. A deduction today is cash you control now, reinvest it, pay down debt, put it in the next deal. Holding and compounding that money for years beats handing it to the IRS early. Same reason insurance companies make money holding premiums before they ever pay a claim.

Recapture is real and worth planning around, but calling the whole thing a loan sells short one of the best tools in the code. It's a big reason so many real estate fortunes get built.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3mo
@Julius Vincent
Using that very same logic, a loan can be replaced by another loan, and borrowing carries the same "time value of money" benefit. So the analogy [depreciation = loan] remains near perfect, colleague. :)
As to your "math still favors you" - I'd replace it with "math might favor you." If we change the assumptions you made, it could work in the opposite direction.
Why can't we all agree that cost segregation could be wonderful but not always so?
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- Christopher Tile
  Accountant · Long Island, NY · Member since 2021 · 189 posts · 153 votes
  3mo
  
  @Michael Plaks - might have to make this my bio on BP.
  
  The "it's just a loan" framing also ignores that recapture isn't guaranteed to be repaid at the same rate you borrowed at (as @Julius Vincent stated)
  
  unrecaptured §1250 gain caps at 25%, but the depreciation you took may have sheltered ordinary income at 32-37%...
  
  TVM plus a rate arbitrage is a stronger case than TVM alone
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  3mo
  Quote from @Christopher Tile:
  
  @Michael Plaks - might have to make this my bio on BP.
  
  The "it's just a loan" framing also ignores that recapture isn't guaranteed to be repaid at the same rate you borrowed at (as @Julius Vincent stated)
  
  unrecaptured §1250 gain caps at 25%, but the depreciation you took may have sheltered ordinary income at 32-37%...
  
  TVM plus a rate arbitrage is a stronger case than TVM alone
  
  I understand when cost segregation sales people (who lately dominate this forum) make one-sided arguments. When my colleagues do the same - it's rather sad.
  Why not mention that it is also possible that you offset a 10-12% bracket income or even 0% tax bracket income with cost segregation today and then eventually have to recapture it at 25%?
  Why are we dismissing this scenario? And I have encountered it in real life, more than once. I know why: because we IRRESPONSIBLY ACT AS COST SEGREGATION PUSHERS INSTEAD OF BEING RESPONSIBLE TAX ADVISORS.
  Once again: nobody is against cost seg, we all endorse it. Yes, me too. But its benefits must be evaluated case-by-case.
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- Julius VincentBusiness Member
  Tax Strategist | CPA, MBA + Wharton FP&A | CFO-Level Planning · Houston, TX · Member since 2025 · 157 posts · 172 votes
  2mo
  Quote from @Michael Plaks:
  
  @Julius Vincent
  Using that very same logic, a loan can be replaced by another loan, and borrowing carries the same "time value of money" benefit. So the analogy [depreciation = loan] remains near perfect, colleague. :)
  As to your "math still favors you" - I'd replace it with "math might favor you." If we change the assumptions you made, it could work in the opposite direction.
  Why can't we all agree that cost segregation could be wonderful but not always so?
  
  @Michael Plaks
  
  Fully agree that cost segs could be wonderful but not always are. I've talked plenty of people out of a study when the facts didn't support one.
  
  The loan analogy is where we still differ. Roll a loan into a new loan and interest accrues the entire time, and when you die the estate still owes the principal. Defer recapture through exchanges and there is no interest charged along the way, and at death the step up wipes the balance to zero. Nobody ever repays it. A liability with no interest, no payment schedule, and full forgiveness at death is missing most of what makes a loan a loan. Happy to keep disagreeing on the label as long as we agree on the planning. :)
  [email protected]281-407-7353
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  2mo
  Quote from @Julius Vincent:
  
  Quote from @Michael Plaks:
  
  @Julius Vincent
  Using that very same logic, a loan can be replaced by another loan, and borrowing carries the same "time value of money" benefit. So the analogy [depreciation = loan] remains near perfect, colleague. :)
  As to your "math still favors you" - I'd replace it with "math might favor you." If we change the assumptions you made, it could work in the opposite direction.
  Why can't we all agree that cost segregation could be wonderful but not always so?
  
  @Michael Plaks
  
  Fully agree that cost segs could be wonderful but not always are. I've talked plenty of people out of a study when the facts didn't support one.
  
  The loan analogy is where we still differ. Roll a loan into a new loan and interest accrues the entire time, and when you die the estate still owes the principal. Defer recapture through exchanges and there is no interest charged along the way, and at death the step up wipes the balance to zero. Nobody ever repays it. A liability with no interest, no payment schedule, and full forgiveness at death is missing most of what makes a loan a loan. Happy to keep disagreeing on the label as long as we agree on the planning. :)
  
  We agree on the planning. :)
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Rohullah Sharifi
Dr · VA · Member since 2025 · 154 posts · 35 votes
3mo
Well, i would say, this is a free money to get. There are other means to manage it properly as per IRC.
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Diana KhanPro Member
Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 634 posts · 222 votes
6d
Quote from @Janet Behm:
I just came from LinkedIn. If you have access, I'm recommending a post: Matt Hamilton, CPA .
His graphic, hand-drawn: DEPRECIATION IS A LOAN.
Massive re-frame.
@Janet Behm, I think it's an interesting way to look at depreciation. I agree with the point raised in the discussion that the benefits really depend on each investor's situation. What works well for someone planning to hold a property long-term may not be the best approach for someone planning to sell soon.
I'm a real estate attorney and investor based in Maryland, and I work with clients on property ownership, real estate transactions, and estate planning. One thing I encourage is thinking about the long-term plan for a property, not just the immediate financial benefit. Decisions about selling, transferring, or passing property to family can have different legal and tax considerations.
I appreciate you sharing this, @Janet Behm. It's a good reminder that real estate decisions involve more than just today's numbers. This connects with the real estate and estate planning work I do, and I'd be happy to stay connected!
[email protected]240-266-0291
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Sagiv O.
Real Estate Investor · Austin, TX · Member since 2017 · 113 posts · 31 votes
5d
I'll land somewhere between the two camps here, Michael. The loan framing is honest about the thing cost-seg marketing usually skips: on the building itself, depreciation is a timing shift, not a permanent benefit.
But it's a loan with unusual terms, and those terms are the whole game: (1) you choose when to repay — nothing comes due until you sell, so a refinance doesn't start the clock; (2) you usually repay at a lower rate than you borrowed at — depreciation shelters ordinary income up to 37%, while unrecaptured 1250 gain caps at 25%; (3) sometimes the loan is forgiven outright — die holding the property and the basis step-up means the recapture never triggers.
The math "might" favor you, as you said, when none of those apply — say you offset low-bracket income and sell a year later. That's exactly when I'd tell someone to skip the study too.
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  5d
  It's a really good description of the "special terms." Your #2, however, is not necessarily true. Sometimes it can even reverse: you might be returning depreciation at a higher rate than what depreciation deduction gave you. Everything is case-by-case.
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