When you purchase a rental property, remember that you are purchasing not just the building and the land. You are also purchasing all of the improvements to the land, such as the landscaping, fencing, carport, and outdoor lighting. And, you are buying the contents of the building, including the wiring, cabinetry, window coverings and floor coverings.
Depreciation is the deduction available to owners of rental property for the wear and tear on the property. Land does not get a depreciation deduction, as it does not normally wear out. Buildings get a depreciation deduction of a small amount each year, as it takes a long time for a building to wear out. For commercial property, the IRS allows a deduction of the building over 39 years, or roughly 2.5% per year. For residential property, including all apartment buildings regardless of size, the deduction is over 27.5 years, or about 3.64% per year.
Land improvements are depreciated more quickly, generally over 15 year. And building contents are depreciated over 5-7 years. So, the more of the purchase price you can reasonably allocate to the land improvements and contents, the more depreciation you will get in the early years to offset your rental income (and maybe even some of your other income).
A cost segregation is a study performed by a team of CPA's and engineers to determine how much of the purchase price of your rental property should be allocated to land, building, land improvements and contents. The IRS in their audit guide for cost segregation REQUIRES that you use a CPA and/or Engineer to do the cost segregation. Of course, you must pay this professional to do the work. My experience is that in MOST cases, the fee is far less than the tax savings.
Warmest regards,
Tom
