Bonus depreciation vs accelerated depreciation for investment real estate - what's the difference?

Thanks for the clear explanation! So if I understand correctly, I can use regular MACRS for the building structure over 27.5 years, but potentially use bonus depreciation for things like the new refrigerator and dishwasher I installed? Would carpet and flooring count as well?

Yes, that's exactly right! The building structure itself (residential rental property) is depreciated over 27.5 years using MACRS. Things like appliances (refrigerator, dishwasher, stove, etc.) are considered 5-year property and can potentially qualify for bonus depreciation. Carpet and flooring can also qualify and are typically treated as 5-year property. You'd want to do what's called a "cost segregation" to properly identify and categorize these components of your property, which allows you to depreciate them separately from the building structure.

Did you actually need to do a cost segregation study? Those are expensive aren't they? I'm wondering if it's worth it for my single family rental I bought for $375k.

Does this actually work? I'm skeptical of tax AI tools since the code is so complex. Did it just give general advice or specific breakdowns for your situation?

For a property valued at $375k, whether a cost segregation study is worth it depends on your specific situation. The tool helped me determine that for my $420k duplex, it would save me about $15k in taxes over the first five years, which more than covered the cost of the study. It gives you an estimated ROI calculation based on your property details. The tool is surprisingly specific. It doesn't just provide general guidance - it analyzes your documents and provides a detailed breakdown of which property components qualify for different depreciation methods. It identified specific items like my HVAC system, appliances, and even exterior improvements that could be separated from the building value. Everything it suggested was backed by tax code references, which my accountant was able to verify.

How does that even work? Don't you still need to verify your identity with the IRS? I'm confused how a third party service can help with that.

Sounds like a scam. Why would I pay someone to call the IRS when I can just do it myself? Plus I wouldn't want to share my tax info with some random company.

They don't actually speak to the IRS for you - they just handle the waiting on hold part. Here's how it works: you provide your phone number, and they call the IRS and wait in the queue for you. When an IRS agent finally picks up, their system automatically connects you to the call. You're the one who speaks directly with the IRS agent and verifies your identity. You don't share any tax information with the service. They're just essentially waiting on hold so you don't have to. I was also concerned about privacy at first, but after researching how it works, I realized they never actually access any of your personal tax details. You're just paying for the convenience of not spending hours listening to hold music.

Wait, so you're saying I'll have to pay back the tax benefits from depreciation when I sell? I didn't realize that. Does that mean depreciation isn't really worth it in the long run?

It's definitely still worth taking depreciation despite recapture taxes. Here's why: you get to deduct depreciation now and defer those taxes until much later when you sell. This is essentially an interest-free loan from the government. You can invest that tax savings for years or decades before having to pay the recapture tax. Additionally, the recapture rate is capped at 25%, which might be lower than your current income tax rate. So if you're in a higher tax bracket now, you benefit from the difference between your current tax rate and the future recapture rate. Plus, there are strategies like 1031 exchanges that can further defer the recapture tax if you reinvest in another property.

Component-based depreciation is actually a well-established practice when done correctly. The key is proper documentation and consistency with your approach. If you do a professional cost segregation study, that provides strong support for your position in case of audit. The IRS has specific guidelines (look up IRS Cost Segregation Audit Techniques Guide) that they follow, so as long as your approach aligns with those, your audit risk isn't significantly increased. Just make sure everything is well-documented and you have a rational basis for the classifications you use. It's the aggressive or poorly supported segregations that tend to trigger problems.

Thanks for the clarification! I'll look up that audit guide you mentioned. Good to know that having proper documentation is the key factor rather than the approach itself being risky.

This is such an important point that often gets overlooked! I'm dealing with this exact situation right now. I was planning to maximize my bonus depreciation to minimize taxes this year, but my CPA pointed out that zeroing out my rental income would eliminate my QBI deduction entirely. For my situation, keeping about $15k in rental income to claim the QBI deduction actually saves me more in taxes than taking the full bonus depreciation. It's definitely worth modeling both scenarios before making the decision. The interplay between these different tax provisions can be pretty complex for real estate investors. @Dmitry Volkov - do you know if there are any good calculators or tools that can help model the QBI vs. depreciation trade-off? I ended up building a spreadsheet but it would be nice to have something more sophisticated.