What is a Depreciation Schedule?

What is a Depreciation Schedule?

A Depreciation Schedule is a detailed breakdown of how an asset’s value declines over time for tax and accounting purposes. In multifamily real estate, this schedule outlines the expected lifespan of the property and its components, determining the amount of depreciation that can be deducted each year.

How Depreciation Applies to Multifamily Real Estate

Multifamily real estate investors benefit from depreciation as a non-cash expense that reduces taxable income. The IRS allows property owners to write off the wear and tear of their property over time, even if the property’s market value is increasing.

Key Aspects of Depreciation in Multifamily Real Estate:

1. Straight-Line Depreciation (27.5 Years)
   • Residential rental properties are depreciated over 27.5 years.
   • The annual depreciation deduction is calculated by dividing the property’s depreciable basis by 27.5.
   • Example: If the depreciable basis is $1,375,000, the annual depreciation expense would be $50,000.
2. Depreciable Basis
   • The depreciation schedule starts with the property’s purchase price minus the value of land (land is not depreciable).
   • Example: If you purchase a multifamily property for $2M and land is valued at $500K, the depreciable basis is $1.5M.
3. Component Depreciation (Cost Segregation)
   • Instead of using only the 27.5-year schedule, certain components (e.g., appliances, flooring, electrical systems) can be depreciated faster.
   • Example breakdown:
     • 5-year: Carpet, appliances, cabinets
     • 7-year: Fixtures, some site improvements
     • 15-year: Sidewalks, fences, landscaping
4. Bonus Depreciation & Section 179
   • Investors can accelerate depreciation using bonus depreciation (currently phasing out) and Section 179 deductions to deduct certain improvements immediately.
5. Recapture Tax
   • When the property is sold, depreciation recapture applies, meaning the IRS taxes the amount of depreciation claimed at up to 25%.

Why It Matters for Investors

• Reduces Taxable Income: Depreciation lowers net taxable income, improving cash flow without affecting operational profits.
• Enhances ROI: Investors often reinvest tax savings into additional properties.
• Estate Planning & Exit Strategy Considerations: Depreciation benefits can be transferred through 1031 exchanges or step-up in basis upon inheritance.

Depreciation Schedule Template for Multifamily Real Estate

Additional Features:

• ‍Bonus Depreciation – If applicable, certain assets with 5-, 7-, and 15-year lives may qualify for 100% immediate write-off (phasing down after 2023).‍
• Cost Segregation Analysis – A detailed study can accelerate depreciation on qualifying components, increasing upfront deductions.‍
• Depreciation Recapture Planning – Consider 1031 Exchange strategies to defer recapture taxes upon sale.