Leveraging Accelerated Depreciation to Build Wealth on Investment Properties

By Scott Conway - San Francisco / Bay Area Realtor®

One of the most underutilized advantages of owning investment real estate is the ability to use tax depreciation to significantly reduce taxable income, even when the property is cash-flow positive.

Recent tax legislation (A.KA. the “big beautiful bill”) expanded and clarified provisions around bonus depreciation and cost segregation, allowing property owners to accelerate depreciation into the early years of ownership instead of spreading it evenly over 27.5 years (residential) or 39 years (commercial).

What this real estate tax strategy means in practical terms

Normally, the IRS requires rental property to be depreciated slowly over decades. But with cost segregation, an engineering-based analysis breaks a building into components (flooring, appliances, electrical, plumbing, etc.) that can be depreciated over 5, 7, or 15 years instead of 27.5 or 39.

When paired with bonus depreciation, a large portion of that accelerated depreciation can often be taken up front, in the first several years of ownership.

Why this matters to families and investors

This allows families to:

• Reduce their taxable income substantially

• Keep more of their rental income in the early years

• Improve cash flow when they need it most (early ownership is when expenses are highest)

• Reinvest those tax savings into additional properties, renovations, or family goals

In many cases, this can mean tens of thousands of dollars in tax savings over the first five years of ownership — without changing the actual economics of the property.

Simple example

Imagine a family buys a small multifamily or rental home:

• Purchase price: $1,200,000

• Building value (excluding land): $900,000

Under normal depreciation:

• $900,000 ÷ 27.5 years ≈ $32,700 per year in deductions

With cost segregation and accelerated depreciation:

• $250,000–$350,000 of that value might be eligible for 5, 7, or 15-year depreciation

• A large portion of that could be deducted in the first 1–5 years

At a combined federal and state tax rate of ~35%, this could mean:

• $100,000 in additional depreciation → ~$35,000 in tax savings

• $200,000 in additional depreciation → ~$70,000 in tax savings

That is real cash that stays in the family’s pocket, improving returns and reducing risk.

Strategic value

Accelerated depreciation:

• Improves after-tax returns

• Makes real estate more competitive with other investments

• Helps families hold onto properties longer because cash flow stress is lower

• Creates a “soft landing” during the early years when vacancies, repairs, and improvements are most common

It’s one of the few legal ways the tax code actively encourages long-term ownership of housing and rental stock.

Important note

This is not a loophole or gimmick, it’s an intentional incentive built into the tax system to encourage housing investment and development. However, it must be done correctly and with professional guidance from a CPA or cost segregation specialist.

As a Realtor, my role isn’t to give tax advice, but to help families understand that real estate has structural financial advantages that go far beyond appreciation and rent, connect them with the right professionals to evaluate whether it makes sense for them financially, and ultimately identify and secure their dream property.

READ MORE

• Multifamily Homes 101: A Strategy Guide for SF Buyers and Investors
  https://legacysfhomes.com/blog/multifamily-homes-101-a-strategy-guide-for-sf-buyers-and-investors

• Is Real Estate Your Best Hedge Against Stocks and ETFs?
  https://legacysfhomes.com/blog/is-real-estate-your-best-hedge-against-stocks-and-etfs

• When an LLC Is a Good Idea for Real Estate Ownership
  https://legacysfhomes.com/blog/when-an-llc-is-a-good-idea

• What Is a 1031 Exchange?
  https://legacysfhomes.com/blog/what-is-a-1031-exchange

• Meet Scott Conway – Real Estate Agent at Legacy Real Estate
  https://legacysfhomes.com/blog/meet-scott-conway-real-estate-agent-at-legacy-real-estate