Accelerated depreciation front-loads deductions that would otherwise take decades to realize.
It essentially lets you reduce your commercial property’s taxable income earlier in its life, often by reclassifying parts of a property into faster-depreciating categories.
By claiming larger deductions upfront, you reduce your tax bill in the early years of owning a property.
That frees up more cash immediately, which you can use to cover operating costs and improve the property, or even to fund your next deal.
What is accelerated depreciation in CRE?
To understand accelerated depreciation, it’s first important to understand what depreciation in general means.
Even if your commercial building goes up in market value, the IRS assumes that it ‘depreciates’ as it wears out over time.
Based on that assumption, you’re allowed to deduct a portion of its original cost each year — reducing your taxable income without needing to spend any money out of pocket.
Accelerated depreciation lets you claim larger deductions earlier in the property’s life.
Under the IRS’s Modified Accelerated Cost Recovery System or MACRS, which we will explain further in the next sections, you can split the property into parts that wear out at different rates.
Instead of spreading the entire building’s cost evenly over 39 years, you can break it into parts that can be written off over 5, 7, or 15 years, reducing your taxable income more in the first several years of ownership.
Which parts of a commercial building can be depreciated on a faster schedule?
The main structure of a commercial building is depreciated over 39 years using the straight-line method.
But many other parts of the property wear out sooner and can be depreciated faster:
- Interior features like carpet and cabinets, as well as non-load-bearing walls
- Electrical or plumbing systems that support specific equipment
- Outdoor improvements such as paving, lighting, signs, etc.
To figure out which parts of your property can be depreciated faster, you’ll typically need a cost segregation study.
It breaks the building into individual components and reclassifies eligible items so you can depreciate them over 5, 7, or 15 years instead of 39.
Land is not depreciable—only the building and qualifying improvements count.
What is MACRS in commercial real estate, and how does it work?
MACRS (short for Modified Accelerated Cost Recovery System) is the method the IRS uses to calculate depreciation on most business properties in the US, including commercial real estate.
If you own a commercial property, here’s how to use MACRS:
1. Start by figuring out your basis.
This just means the total amount you’ve invested in the property at the time it’s ready to use.
It includes the purchase price, plus things like legal fees, recording costs, and any major improvements made before you start renting or using the building.
2. Separate the land from the building.
As we mentioned, the IRS doesn’t let you depreciate land, so you’ll need to split the total cost between the land and the building.
One common way to do this is by using an appraisal that breaks down the value.
If you don’t have that, a property tax assessment or another reasonable estimate can also work as long as it clearly separates land from the building.
3. Break the building into parts with different lifespans.
Not every part of the property lasts the same amount of time. Under MACRS, you assign each part to a “class life” based on how quickly it wears out:
- The main building structure is depreciated over 39 years
- Items like carpet and appliances or certain light fixtures may qualify for 5- or 7-year depreciation
- Land improvements like sidewalks, parking lots, and landscaping usually fall into the 15-year category
4. Apply the IRS depreciation methods.
Each type of asset has a specific way it gets depreciated:
- Real property (the building) uses straight-line depreciation over 39 years, starting halfway through the month you put it in service (this is called the mid-month convention).
- Personal property (like fixtures and equipment) often uses the 200% declining balance method, which gives you bigger deductions in the early years. The IRS provides tables showing exactly how much to deduct each year, so you don’t need to calculate it by hand.
You don’t need to calculate MACRS depreciation yourself — your CPA or tax software can do that.
But you should still understand how the rules work so you can spot tax-saving opportunities and make informed decisions about your property.
What’s an example of accelerated depreciation in CRE?
This simple, straight-line example of accelerated depreciation in CRE should help you see how the timing of deductions affects your tax savings.
Let’s say that you purchased a small commercial building for $1,000,000. The closing statement or tax assessment allocated $200,000 to land and $800,000 to the building.
Since the land isn’t depreciable, only the $800,000 building is eligible.
Under straight-line depreciation over 39 years:
Annual depreciation = $800,000 ÷ 39 ≈ $20,513
At a 32% combined federal and state tax rate, the deduction saves about $6,564 in tax each year.
But with accelerated depreciation strategies, you can push more of those deductions into the early years and reduce the property’s taxable income.
Let’s say a cost segregation study finds that $160,000 of the building is made up of items that qualify for 5-year depreciation.
Using MACRS (which we will further explain in the next section), you might be able to deduct 20% of that $160,000 in the first year:
$160,000 × 20% = $32,000 in first-year deductions for those short-lived assets
The remaining $640,000 still gets depreciated over 39 years: $640,000 ÷ 39 = about $16,410
So, your total Year 1 depreciation would be:
$32,000 (accelerated portion) + $16,410 (straight-line portion) = $48,410
Compared to $20,513 under the regular method, that’s an extra $27,897 deducted in the first year.
And at a 32% tax rate, that could save you about $8,927 more in taxes—just in year one
Tips to avoid mistakes in accelerated depreciation
- Always keep good records. Don’t lose documents like the closing statement, any appraisals, receipts for capital improvements, and breakdowns of construction costs. These form the basis for your depreciation schedule.
- If you’ve bought a larger property — typically with $1 to $2 million or more allocated to the building — it’s worth asking your CPA about a cost segregation study. You’ll have to pay for these reports, but they can save you thousands in taxes early on because they identify parts of the property that qualify for faster write-offs.
- Check what’s allowed in the current tax year. Tax rules change, after all, and especially when it comes to bonus depreciation. You might be able to deduct the full cost of certain assets right away, depending on the law at the time.
And don’t assume your state follows the same rules as the IRS. Some states don’t allow bonus depreciation or Section 179 deductions. Your CPA should run both sets of calculations, so you see the full picture. - Before your next acquisition or renovation, ask your tax advisor:
- Would a cost segregation study help on this property?
- How much bonus or Section 179 expensing can I apply this year?
- What will depreciation recapture look like when I exit?
Start maximizing your real estate returns
Connect with our team here at Private Capital Investors to talk about flexible financing options that can be adjusted based on your commercial investment goals.
