Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether you rent it out or occupy it by your business, here’s how you can maximize your real estate depreciation deduction.
Generally, buildings and improvements to them must depreciate over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But deductions on depreciation for real estate that is considered personal property can generally be over much shorter periods. An example of this would be furniture and equipment. Plus, for the tax year such assets are acquired and put into service. Additionally, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).
If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to consider as parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.
As noted above, the cost of land isn’t depreciable. But the cost of improvements to land counts as a deduction on the depreciation for real estate. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.
Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.
Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.
There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently require depreciation. If you’d like to learn more about saving income taxes with business real estate, please contact us.