residential rental market, from condos through large multi-family, the most common way is through a Chattel Appraisal.

Let’s look at an example:

Property Purchase Price $450,000

Land Value $75,000

Building Amount to Be Depreciated $375,000

We will assume this is 4 family and falls under the 27.5 year guidelines.

Annual Deduction for Depreciation $375,000/27.5 years = $13636.36

A conservative estimate for the amount of Chattel in any prop

As an Accountant, you help guide your clients through the often confusing and complex world of the IRS Tax Code. You help them manage their bottom lines by maximizing their Return on Investment. So, just how much do you depreciate your clients?

Real estate has long been a popular way for people to make money, I’m sure you see it every day. There are so many ways to invest in real estate, it is just about mind numbing when you think about it. Rental real estate has gained much popularity with the inventories of homes for sale increasing nationwide. Along with rental real estate comes a large list of expenses your clients can use and deduct: travel, background checks, utilities, taxes, mortgage interest, CPA fees and the list goes on. These expenses typically require payment by cash, check or credit card.

Depreciation, on the other hand, does not require the exchange of money. Depreciation is an expense that allows for spreading the cost of the building over a period of time. Current IRS Guidelines allow a 39 year depreciation schedule for commercial properties and 27.5 years on residential properties. However, there is more that can be depreciated under current IRS Guidelines.

The IRS allows an investor to depreciate the personal property, commonly called Chattel, over an accelerated period of 5 to 15 years. Chattel includes: flooring, cabinets, appliances, window treatments, landscaping, pools, sidewalks and this list goes on. Over 65 items identified by the IRS can be accelerated.

So how did this come about? With a court case called Hospital Corporation of America vs. Comm [109 TC 21 (1977)]. This case rules it is permissible to separate Section 1245 Property from Section 1250 Property. After this case was settled, the IRS issued Audit Techniques Guide on cost segregation. In this guide, the IRS describes several methods for determining the value of Section 1245 Property. For the residential rental market, from condos through large multi-family, the most common way is through a Chattel Appraisal.

Let’s look at an example:

Property Purchase Price $450,000

Land Value $75,000

Building Amount to Be Depreciated $375,000

We will assume this is 4 family and falls under the 27.5 year guidelines.

Annual Deduction for Depreciation $375,000/27.5 years = $13636.36

A conservative estimate for the amount of Chattel in any prope

ch popularity with the inventories of homes for sale increasing nationwide. Along with rental real estate comes a large list of expenses your clients can use and deduct: travel, background checks, utilities, taxes, mortgage interest, CPA fees and the list goes on. These expenses typically require payment by cash, check or credit card.

Depreciation, on the other hand, does not require the exchange of money. Depreciation is an expense that allows for spreading the cost of the building over a period of time. Current IRS Guidelines allow a 39 year depreciation schedule for commercial properties and 27.5 years on residential properties. However, there is more that can be depreciated under current IRS Guidelines.

The IRS allows an investor to depreciate the personal property, commonly called Chattel, over an accelerated period of 5 to 15 years. Chattel includes: flooring, cabinets, appliances, window treatments, landscaping, pools, sidewalks and this list goes on. Over 65 items identified by the IRS can be accelerated.

So how did this come about? With a court case called Hospital Corporation of America vs. Comm [109 TC 21 (1977)]. This case rules it is permissible to separate Section 1245 Property from Section 1250 Property. After this case was settled, the IRS issued Audit Techniques Guide on cost segregation. In this guide, the IRS describes several methods for determining the value of Section 1245 Property. For the residential rental market, from condos through large multi-family, the most common way is through a Chattel Appraisal.

Let’s look at an example:

Property Purchase Price $450,000

Land Value $75,000

Building Amount to Be Depreciated $375,000

We will assume this is 4 family and falls under the 27.5 year guidelines.

Annual Deduction for Depreciation $375,000/27.5 years = $13636.36

A conservative estimate for the amount of Chattel in any prop

building over a period of time. Current IRS Guidelines allow a 39 year depreciation schedule for commercial properties and 27.5 years on residential properties. However, there is more that can be depreciated under current IRS Guidelines.

The IRS allows an investor to depreciate the personal property, commonly called Chattel, over an accelerated period of 5 to 15 years. Chattel includes: flooring, cabinets, appliances, window treatments, landscaping, pools, sidewalks and this list goes on. Over 65 items identified by the IRS can be accelerated.

So how did this come about? With a court case called Hospital Corporation of America vs. Comm [109 TC 21 (1977)]. This case rules it is permissible to separate Section 1245 Property from Section 1250 Property. After this case was settled, the IRS issued Audit Techniques Guide on cost segregation. In this guide, the IRS describes several methods for determining the value of Section 1245 Property. For the residential rental market, from condos through large multi-family, the most common way is through a Chattel Appraisal.

Let’s look at an example:

Property Purchase Price $450,000

Land Value $75,000

Building Amount to Be Depreciated $375,000

We will assume this is 4 family and falls under the 27.5 year guidelines.

Annual Deduction for Depreciation $375,000/27.5 years = $13636.36

A conservative estimate for the amount of Chattel in any prop

s list goes on. Over 65 items identified by the IRS can be accelerated.

So how did this come about? With a court case called Hospital Corporation of America vs. Comm [109 TC 21 (1977)]. This case rules it is permissible to separate Section 1245 Property from Section 1250 Property. After this case was settled, the IRS issued Audit Techniques Guide on cost segregation. In this guide, the IRS describes several methods for determining the value of Section 1245 Property. For the residential rental market, from condos through large multi-family, the most common way is through a Chattel Appraisal.

Let’s look at an example:

Property Purchase Price $450,000

Land Value $75,000

Building Amount to Be Depreciated $375,000

We will assume this is 4 family and falls under the 27.5 year guidelines.

Annual Deduction for Depreciation $375,000/27.5 years = $13636.36

A conservative estimate for the amount of Chattel in any prop

residential rental market, from condos through large multi-family, the most common way is through a Chattel Appraisal.

Let’s look at an example:

Property Purchase Price $450,000

Land Value $75,000

Building Amount to Be Depreciated $375,000

We will assume this is 4 family and falls under the 27.5 year guidelines.

Annual Deduction for Depreciation $375,000/27.5 years = $13636.36

A conservative estimate for the amount of Chattel in any property is 10% of the purchase price. Let’s use the same example above and compute the depreciation with Chattel.

Property Purchase Price $450,000

Chattel Value $45,000

Land Value $75,000

Building Amount to Be Depreciated $330,000

New Depreciation Amounts:

$330,000/27.5 years = $12,000 Straight Line

$45,000/5 years = $9,000 Accelerated

Total Depreciation= $21,000

This is an additional depreciation amount of $7,363.64!!

Let’s now look at actual tax dollar savings of this investor who is in a 30% Tax Bracket:

Straight Line Only $13,636.36 x 30% = $4,090.91

With Acceleration $21,000.00 x 30% = $6,300.00

Increased Savings $6,300.00 - $4,090.91 = $2,209.09

This client would save over $2,000 per year in the early years of ownership, when it is very difficult to cash flow. This amount oftentimes is the difference between breaking even and making money.

So, now you are asking about recapture. Recapture and the recapture tax apply whenever a depreciated asset is sold. The recapture tax percentage rate is based on the investors’ income tax rate and is capped at 25%. This allows your client to keep 75% and utilize the time value of money. Let’s again use our example and see the effects of recapture.

We will assume this property was held for 5 years and is selling for $521,673.33 which represents annual appreciation of 3%:

Purchase Price $450,000

Depreciation Taken $21,000 x 5 years = $105,000

Sales Price $521,673.33

Recapture Tax $105,000 x 25% = $26,250

Amount Kept by Investor $105,000 - $26,250 = $78,750

You can see this investor was taxed for Recapture at 25% since their 30% Tax Bracket was higher than the capped rate of 25%. The $78,750 of depreciation, which resulted in $23,625($78,850 x 30% tax rate) tax savings, your client would keep.

There would still be a capital gain event