How Real Estate Investors Use Depreciation and Cost Segregation to Save on Taxes

One of the biggest advantages of owning investment real estate, especially multi-unit properties, is how the tax code treats depreciation. This is something many buyers don’t fully understand, but it can make a huge difference in your long-term returns.

Let’s break it down in simple terms.

What is depreciation?

Depreciation allows real estate investors to write off the value of a property over time, even if the property is appreciating in value.

For residential rental properties, the IRS allows you to depreciate the building portion of the property over 27.5 years.

Important note:

• You cannot depreciate the land
• Only the building and specific improvements qualify

Depreciating a property means you can reduce your taxable income every year, even while the property is appreciating.

Example #1: $900,000 property in Santa Clarita

Let’s say you buy a $900,000 home and convert it into a rental.

A typical breakdown might look like this:

• Land value: $180,000
• Building value: $720,000

Using standard depreciation:

• $720,000 ÷ 27.5 years ≈ $26,000 per year in depreciation

That means you may be able to reduce your taxable income by about $26,000 per year, even if the property is cash-flow neutral or positive. Saving the average investor $6000 -$7000 annually!

Example #2: $1.5 million property in Van Nuys (2 - 3 units)

Now let's look at a multi-unit property, which is where things get even more interesting.

Assume:

• Purchase price: $1,500,000
• Building value: $1,200,000
• Standard depreciation:

• 1. $1,200,000 ÷ 27.5 ≈ $43,600 per year

That’s already a substantial tax benefit - but this is where cost segregation comes in.

What is cost segregation?

A cost segregation study breaks the property into components (such as flooring, electrical, plumbing, appliances, and certain structural items).

You can depreciate some of these components faster than 27.5 years - often over 5, 7, or 15 years, allowing you to:

• Take more depreciation sooner
• Create larger paper losses in the early years
• Potentially offset rental income or other income (depending on your tax situation)

In many cases, a cost segregation study can shift 20% - 30% (or more) of a building’s value into faster depreciation categories. A 900K would get you  7-9K and a 1.5 Mil property could get you  12-14K annually cash back!

Why appreciation still matters

Here’s the powerful part:

• Your property can be going up in value
• You can be paying down the loan
• And at the same time, the IRS allows you to show a paper loss

This is why real estate is one of the most powerful wealth-building tools available.

If you add depreciation, appreciation, Mortgage pay down and take all of the write offs available. Real Estate is still a tremendous investment assuming you know how to explain it to a client!

A quick reminder

Tax rules are complex and personal. Depreciation and cost segregation can be extremely powerful, but they should always be reviewed with a qualified CPA to ensure they’re done correctly and align with your overall tax strategy. You must be a “real estate professional” to depreciate a property, but that could mean you have two rental properties and spend time looking for more. Again, this is a CPA question!

Business Planning Lunch and Learns - Next Week

Next week, I'm hosting business planning trainings on:

• Monday the 26th
• Tuesday the 27th
• Wednesday the 28th

In these sessions, we'll work on:

• Building better daily habits
• Growing your business with intention
• Meeting more potential leads
• Turning those leads into real clients

If you're interested in attending, let me know, and I'll add you to the list. Lunch and learns are from 11:30 AM – 1:00 PM, and we provide lunch each day! You only need to attend one day, and we will figure out a schedule from there.

Please let me know if you have any questions or if you or any of your clients, friends, or family members need my guidance. I’m just a call, text, or email away.

📞 Direct Line: 661-291-2222 – Text OK

📞 Cell: 661-714-6258 – Text OK

📞 Office: 661-260-2970 ext. 2222 – Text OK

📧 Email: Mike@AugustaFinancial.com

But wait, there’s more…

Interest Rates

Interest rates are up a little more today! We had a 1-week window when rates were a little better, but all the turmoil and uncertainty in the world are a little higher today, and that’s just how it is! The latest measurable manifestation of this morning’s fallout is the announcement that a Danish pension fund is liquidating its Treasury holdings. Other EU countries could follow suit, creating problems for those EU funds, but rationality doesn’t always prevail amid geopolitical brinksmanship. Japan is also playing a supporting role, causing a massive surge in Japanese yields overnight and a bit of sympathy selling in US Treasuries.

Loan Programs

• We do loans on Non-warrantable condos!
• We offer 12-day escrows for pre-approved buyers, including conventional, FHA/Jumbo/Bridge loans.
• We provide loans in all 50 states, so call me with anything you need.
• Government loans (FHA/VA/USDA) are in the 5s.
• Conventional loans up to $832,750 are in the high 5’s and low 6s.
• High-balance loans from $832,751 to $1,249,125 are also in the 6s.
• Jumbo loans above $1,249,125 are in the 6’s.
• ARMS in the 5’s and some in the 6’s
• Bank statement loans are available again with 10% down, with larger down payments in the 6’s++.
• Profit and Loss Statement loans require 20% down - no bank statements needed, only a profit and loss statement!
• 0 down loans are available in the high 6s, with a minimum credit score of 620, up to $1,325,000.
• Private Money lenders offer Hard Money Loans with 35% down.
• No-Ratio Loans require a 30% down payment.
• DSCR (Debt Service Coverage Ratio) loans are available with as little as 15% down.
• Bridge Loans typically have an interest rate of 7.99% with limited fees, helping you get where you need to go!
• 3/2/1 Buydowns, 2/1 Buydowns, and 1/0 Buydowns are available at great starting rates!

Please note that interest rates are subject to change without notice, and the information above reflects LA County Loan Limits.

**Good News for Condos:**

Nada today!

**Bad News for Condos***

Nothing today!

CONDO HELP!!!

If you have a listing or a buyer interested in a specific condo and are unsure whether it is warrantable or Non-warrantable, please call me, and we can look up Fannie’s list in real-time. We don’t know when something has changed, and it would be impossible to track everything day by day, but we don’t mind looking up a few items each day.

The full state of California’s naughty list has been added to: MikeMeena.com! See the link below:

https://mikemeena.com/non-warrantable-condos/

Let me know if you hear anything new about condos or townhouses.

I am available every day if you need anything.

📞 Direct Line: 661-291-2222 – Text OK

📞 Cell: 661-714-6258 – Text OK

📞 Office: 661-260-2970 ext. 2222 – Text OK

📧 Email: Mike@AugustaFinancial.com

Have a great day and an even better tomorrow! Please call me when you have a client who needs to borrow!