A Quick Breakdown on Depreciation (and Why It Pays Off)

Here’s something many investors don’t realize at first: depreciation can quietly become one of the biggest financial advantages you have in commercial real estate. It’s one of those behind-the-scenes benefits that strengthens your returns year after year.

At its core, depreciation lets you reduce your taxable income even while your property might be increasing in market value. It’s a non-cash deduction — meaning you don’t spend anything to get it, but you still enjoy the tax savings.

Here’s what that actually means for investors:

• More cash in your pocket each year
Because depreciation lowers your tax bill, you keep more of your rental income. That extra cash can go into upgrades, paying down your loan faster, or setting up your next acquisition.

• The ability to offset income
Depreciation can offset passive rental income, and for those who qualify for Real Estate Professional Status, it can even offset active income like W-2 wages. That flexibility can create meaningful tax savings for the right investor.

• Faster wealth-building opportunities
The less you pay in taxes, the more you can reinvest — and compounding takes it from there. Depreciation is one of the quiet engines behind long-term portfolio growth.

• Accelerated benefits through cost segregation
A cost segregation study breaks your property into components (lighting, flooring, parking lots, etc.) and depreciates many of them over 5, 7, or 15 years instead of the standard 39. This accelerates deductions into the early years of ownership, when cash flow usually matters most.

• Ways to defer taxes when it’s time to sell
Yes, depreciation reduces your taxes while you own the property — but it does trigger depreciation recapture when you sell. The good news? A 1031 exchange lets you defer both recapture and capital gains by rolling your proceeds into another like-kind property.

• Estate planning advantages
If you hold the property until death, your heirs receive a step-up in basis to current market value. In many cases, this wipes out both capital gains and depreciation recapture entirely — a major benefit for long-term legacy planning.

Depreciation is one of the smartest (and most underused) tools in CRE, but every property and investor profile is different. A good tax professional can help you map out what’s available and how to maximize it under IRS rules.

If you want help thinking through how depreciation could work for your next deal, I’m happy to walk through the options with you.

Wishing you a wonderful holiday season and a bright, prosperous year ahead. If you’re planning your 2026 real estate investment strategy, I’m here anytime to help you think through the numbers.