Topic 06 · 6 min read
Speeding It Up: Components, Bonus, and Section 179
Some of a building is not really a building.
A purchase is not one asset. Carpet, appliances, cabinetry, specialty wiring, paving, and landscaping have shorter lives than the shell. Identifying them — the job of a cost segregation study — moves part of the purchase onto 5, 7, or 15-year schedules, and bonus depreciation can write much of that off in the first year.
What to know
- Cost segregation
- An engineering-based study splits the purchase into components with their own recovery periods, front-loading the deductions substantially.
- Bonus depreciation
- Qualifying short-life property can be deducted largely or entirely in the year it is placed in service, subject to the percentage in effect that year.
- Section 179 is narrower
- It expenses certain business property immediately but comes with income limits and does not fit most residential rental activity.
- Faster is not always free
- Accelerated deductions are borrowed from later years, and more of the write-off returns as ordinary income at sale.
The tax benefit
Deductions arrive years earlier, which is worth real money — the same dollars, but available now instead of across three decades.
Worked example
What a study finds
A study on a $325,000 building basis reclassifies $65,000 into 5- and 15-year property. With bonus depreciation available, much of that $65,000 is deductible in year one instead of over 27.5 years.
Watch out for
- Studies cost money and only pay off above a certain property size.
- Bonus percentages change with legislation; the year the property is placed in service controls.
- Bigger early losses often run into the passive loss limits covered in installment 4.
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