Accelerated cost recovery
Depreciation: Is allowed by the IRS on real estate improvements and personal property used to produce income, it is treated as an operating expense, reducing income taxes due and reducing the tax bases of the property. U.S. Code § 168 – Accelerated cost recovery system.
It is best to consult a tax professional to prepare your initial depreciation table. The IRS may determine that if depreciation is allowed, it can be deemed to have been taken, thus reducing your taxes bases even if you did not take the depreciation.
See Chart below: Shows the IRS years allowable for calculating depreciation.
|Other equipment||7 years|
|Land improvements: sidewalks, Parking lots etc.||15 years|
|Residential rental property||27.5 years Straight line|
|Non-residential real property||39 years. Straight line|
For example, the cost of a roof or a parking lot could be depreciated over 15 years rather than the 27.5 straight line term, reducing the taxable income from a property.
When purchasing real estate, the buyer will want to allocate the maximum amount to the building and its components, rather than to the land. Personal property (such as appliances) should be stated and valued separately in the purchase agreement to set the depreciation value.
A Cost Segregation study can determine the relative value of the different classes of property for depreciation purposes. There may be significant tax savings both currently and retroactively. Recapture rules may apply at sale of the property.
When installing an improvement on your property you could ask the company you purchase the product or manufacture for a letter indicating the products useful life, for depreciation purposes.
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