How Accelerated Depreciation in Real Estate Cuts Your Taxes

If you’re a real estate investor, you’ve probably heard the term accelerated depreciation. But what does it really mean—and how can it help you save money on your taxes and grow your cash flow?

In this article, we’ll break down accelerated depreciation in real estate using clear, simple language.

Whether you’re just getting started or already own multiple rental properties, this guide will help you understand how this powerful tax strategy can work for you.

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What Is Depreciation in Real Estate?

When you own rental property, the IRS lets you take a tax deduction each year to account for the property’s wear and tear. This is called depreciation.

For residential rental properties, the standard method is to spread the cost of an asset over 27.5 years. For commercial properties, it’s over 39 years.

Even though your property value might be going up, for tax purposes, the IRS lets you claim that the building is slowly losing value.

Related: Real Estate Depreciation: #1 Tax Strategy for Busy Professionals

What Is Accelerated Depreciation?

Accelerated depreciation is a tax strategy that lets you deduct more of a property’s value earlier in the useful life of the asset.

Instead of spreading out deductions evenly (like the straight-line depreciation method), accelerated depreciation allows for larger deductions in the first few years.

This can help reduce your taxable income quickly and boost your cash flow—especially helpful in the initial years after buying a property.

How Accelerated Depreciation Works

Not all parts of a property need to be depreciated over 27.5 or 39 years. Some parts—like appliances, carpeting, cabinets, landscaping, and lighting—can be depreciated much faster.

Asset Type	Depreciation Schedule	Examples
Personal Property	5 years	Furniture, fixtures, appliances
Office Equipment	7 years	Desks, computers, copiers
Land Improvements	15 years	Sidewalks, parking lots, fences

Why Use Accelerated Depreciation?

Many rental property owners use accelerated depreciation to reduce income taxes in the first year or two. It can also create a paper loss even when your rental income is positive.

This can help offset other income, especially if you’re a real estate professional. The strategy also improves cash flow and allows you to reinvest tax savings into more real estate investments.

The Power of a Cost Segregation Study

To use accelerated depreciation, you’ll need a cost segregation study. This study breaks your property into parts with different depreciation schedules.

A specialist (like an engineer or CPA) will review your purchase price, blueprints, and site plans to determine which assets qualify for shorter depreciation periods.

Cost segregation studies are often used for residential rental properties and commercial property like office buildings or warehouses. They can also apply to qualified improvement property, such as interior renovations.

Many real estate owners find that 20% to 40% of their building’s components can be depreciated faster.

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Bonus Depreciation: An Extra Boost

One major advantage for investors is bonus depreciation. This lets you write off 100% of the cost of qualifying items in the first year.

Thanks to the Tax Cuts and Jobs Act, investors were able to use 100% bonus depreciation from 2017 through 2022. Starting in 2023, it’s being phased out by 20% per year until it ends in 2027.

So in 2025, you can still use 60% bonus depreciation on qualified property (with a useful life of 20 years or less).

Accelerated Depreciation Example

Let’s say you buy a residential property for $500,000. The land is worth $100,000 and isn’t depreciable. That leaves $400,000 as the depreciable building value.

You do a cost segregation study and break out $20,000 for appliances (5-year life) and $30,000 for landscaping (15-year life). The remaining $350,000 is depreciated over 27.5 years.

With straight-line depreciation, you’d deduct about $14,545 per year from the $400,000 building value.

But with accelerated depreciation, your first-year deductions could include $30,000 from bonus depreciation on appliances and landscaping, plus $12,727 from regular depreciation on the rest of the building.

That’s a total of $42,727 in the first year—almost triple the standard amount.

Tax Benefits of Accelerated Depreciation

Using accelerated depreciation lets you lower your taxable income in the early years of ownership. This means a smaller tax bill and better cash flow.

You can also offset income from other real estate deals and even use paper losses to defer taxes into future years.

If you qualify as a real estate professional, you might be able to use those losses to offset your ordinary income as well.

Related: How to Qualify for Real Estate Professional Tax Status

What About Depreciation Recapture?

Here’s the catch: when you sell the property, you may owe depreciation recapture tax.

The IRS sees depreciation as reducing your cost basis. When you sell, the IRS may tax that depreciation at up to 25%.

This means you get tax benefits now, but you may owe taxes later in the years of ownership. One way to delay this is by doing a 1031 exchange, which defers both capital gains and recapture taxes.

Depreciation Methods You Should Know

There are several methods under the Modified Accelerated Cost Recovery System (MACRS). The straight-line method spreads depreciation evenly over time.

The double-declining balance method offers larger deductions in earlier years. The sum-of-the-years-digits method also allows front-loaded deductions. Each method has unique benefits, depending on your tax strategy.

Residential vs. Commercial Property Depreciation

Residential rental property is typically depreciated over 27.5 years using straight-line depreciation. It’s a simple method and effective for tax savings. Commercial property, on the other hand, follows a 39-year schedule.

Because commercial buildings have more components that qualify for shorter recovery periods, they often benefit more from accelerated depreciation.

Who Should Use Accelerated Depreciation?

Accelerated depreciation is a good idea for business owners with rental properties, commercial real estate investors, and real estate professionals looking to reduce income taxes.

It’s especially useful for those who want better cash flow in the first or second year of ownership.

Mistakes to Avoid

Be sure to exclude the land value from your depreciation calculation, since land isn’t depreciable. Don’t forget to update your depreciation schedule if you make improvements.

Skipping a cost segregation study could mean missing out on major deductions. And always consult a tax advisor to make sure you’re applying the rules correctly.

Final Thoughts

Accelerated depreciation is a powerful tool for building financial benefits in real estate.

By front-loading your depreciation expenses, you can cut down on your tax burden, create larger deductions in the early years, and grow your portfolio with the added cash flow.

Make sure to talk with a qualified tax professional before using this strategy. It might just be the key to scaling your real estate business faster while keeping more money in your bank account.

If you’re investing in residential properties, commercial real estate, or any type of rental property, don’t overlook the benefits of accelerated depreciation.

The IRS rules may be complex, but with the right help, you can use them to your advantage.

Ready to unlock bigger tax savings? Accelerated depreciation might be the strategy your portfolio needs.