--- title: Maximizing After Tax Income with Depreciation Deductions description: In this blog article, we’ll present an overview of how investors can take advantage of real estate depreciation rules and minimize the tax bite on ongoing income as well as at time of sale. image: https://blog.fgg1031.com/hubfs/Depreciation%20(1).png --- [info@firstguardiangroup.com](mailto:) [(866)398-1031](tel:(866)398-1031) [![fgg](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2022/fgg.png)](https://brokercheck.finra.org/individual/summary/6470002) [![fgg-871923](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2023/fgg-871923.png)](https://www.bbb.org/us/ca/san-jose/profile/commercial-real-estate/first-guardian-group-1216-887513) [![logo](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/logo.png?width=175&height=56&name=logo.png "logo")](http://fgg1031.com) - [Home](https://fgg1031.com/) - [About Us](https://fgg1031.com/about-us/) - [Current Offerings](https://fgg1031.com/property-listings-directory/) - [Resource Center](https://fgg1031.com/resource-center/) - [Glossary](https://fgg1031.com/glossary/) - [Accommodators](https://fgg1031.com/accommodators/) - [FAQ](https://fgg1031.com/faqs/) - [Tax eBook](https://pages.fgg1031.com/resources/real-estate-tax-deferral-strategies-ebook) - [Real Estate eBook](https://pages.fgg1031.com/real-estate-investing-in-the-new-era2) - [QI eBook](https://pages.fgg1031.com/resources/qualifiedintermediary/ebook) - [Tax Calculator](https://fgg1031.com/tax-calculator/) - [Newsroom](https://fgg1031.com/newsroom/) - [Blog](https://blog.fgg1031.com/blog) - [Events](https://fgg1031.com/events/) - [Contact Us](https://fgg1031.com/contact/) ![search-interface-symbol](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2022/search-interface-symbol.png) ![loader](https://f.hubspotusercontent-eu1.net/hubfs/24949188/Business%20and%20Finance/global/22.gif) ![close](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2022/close.png) From Pages From Blog Pages Load More Load More **Sorry, we couldn't find a match for  "".** Check your spelling or try a related search term. 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Investors considering a 1031 exchange may now face dozens of DST offerings involving ap\[...\] [Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [DST](https://blog.fgg1031.com/blog/topic/dst) [Read More](https://blog.fgg1031.com/blog/introducing-fgg-compass) ## Recent Posts [1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [Depreciation Recapture](https://blog.fgg1031.com/blog/topic/depreciation-recapture) # Maximizing After Tax Income with Depreciation Deductions By [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Investing in real estate can provide important tax benefits. One of the most significant is the ability to depreciate the value of the investment over time to reduce tax obligations on income generated by the property. In some cases, income can be fully sheltered from taxes.  In this blog article, we’ll present an overview of how investors can take advantage of real estate depreciation rules and minimize the tax bite on ongoing income as well as at time of sale. ##### **What is Depreciation?** In general, investors are allowed to deduct the cost of purchased assets against their income in two ways. Items having a short-term useful life such as supplies or repairs are expensed and fully deducted against income in the year they were put into service. The cost of assets with a useful life greater than one year or more are typically proportionately deducted or depreciated over their full useful life. ##### **What is the Depreciation Process for Rental Properties?** Per IRS guidelines, real estate investors are permitted to deduct a portion of a building’s value against income over a designated useful life. This is permitted even if the property is not substantially deteriorating or being used-up as it ages. Only the building value can be depreciated – not the land which is regarded as having an infinite useful life.  Different types of real estate assets have different allowed depreciation schedules. Residential real estate such as single-family rentals or apartments can be generally depreciated over 27.5 years while commercial assets such as office buildings or retail properties are normally depreciated over 39 years. The determination of the depreciable portion of a real estate investment should be done by a qualified third party such an appraiser or a tax assessor.  ##### **Impact of Depreciation on Cost Basis** The initial cost basis for rental real estate is your acquisition cost (including any mortgage debt you obtained plus miscellaneous acquisition related fees) minus the value of the land it's built on.  If you invested $500,000 in a rental property and the land is appraised for $100,000, your beginning cost basis would be $400,000. For tax purposes, the original cost basis is adjusted over time by 1) reducing the original basis by the amount of allowed depreciation 2) increasing the basis by the value of improvements made to the property. The new basis is referred to as “adjusted basis.” Back to our previous example, if, after purchasing the property, you invested an additional $50,000 to add a new roof, your adjusted cost basis for depreciation purposes would be $400,000 of original basis plus $50,000 in improvements or $450,000. ##### **Why Depreciation Is a Huge Advantage for Real Estate Investors** Depreciation write-offs can dramatically reduce income tax obligations through providing an annual tax deduction that isn’t really an expense. A well-maintained building will not be fully used up and or become worthless at the end of its government mandated useful life – yet, thankfully, the IRS allows real estate investors to offset taxable income with this faulty presumption.  Therefore, income from rental properties generally has a lower effective tax rate than virtually any other type of income. In fact, depreciation along with other allowed deductions may result in rental properties showing a loss for tax purposes, even though they are profitable. ##### **Is it Possible to Increase Depreciation Deductions?** Yes. As powerful as standard depreciation deductions can be, there are several legitimate techniques that can further reduce taxable income. A common technique is to analyze the components of a building and depreciate items having a shorter useful life separately from items that conform to the standard overall useful life of the building. For example, the IRS allow investors to depreciate appliances over a useful life of 5 years. Terms used for this approach are “component depreciation” or “cost segregation.”  This is not a “do-it-yourself” process and generally requires a knowledgeable third party to review the design of the building and complete a formal “cost study” to highlight those components that may be eligible for accelerated depreciation – or even immediate expensing i.e., writing off the full value of the item in the first year of service rather depreciating it over time – all of which can increase depreciation deductions and reduce taxes.  Some sponsors of Delaware Statutory Trust (DST) investments provide cost segregation studies to investors. If such studies are not available, DST investors may still be able to obtain one at a nominal fee.  Component depreciation can be a complex area to navigate that will require the services of a qualified real estate tax advisor and appraiser and many investors may be satisfied by using the simpler straight-line useful life guidelines allowed by the IRS.  ##### **Depreciation Recapture ** Depreciation can be a two-edged sword – it’s nice to have it when you are owning your property, but it can become a huge challenge to overcome when selling it. Why? As previously discussed, depreciation reduces the taxable basis of an investment property over time. If we paid $500,000 for a rental and deducted $200,000 in depreciation write-offs over the holding period of the investment, the adjusted tax basis would drop to $300,000 (presuming no capital investments were made).  If we then sold the property for $1,000,000, our taxable gain would be $1,000,000 less the adjusted basis of $300,000 or $700,000 – and not the $500,000 between what we originally paid and eventually sold it for.  Not only would an investor have potential tax liability on the $700,000 capital gain, but the IRS would also require that they pay a 25% additional tax on all the depreciation that was taken (or could have been taken). Depreciation recapture is arguably one of the harshest taxes to be paid at time of sale and, combined with capital gains and other taxes, can easily result in a combined tax liability equal to 35-40% of the gains. Ouch! Very fortunately, real estate investors can potentially fully defer all these taxes by successfully completing a 1031 exchange. We’ll spare you the details of how a 1031 exchange works in this blog and instead refer to other written materials on our [www.FGG1031.com](http://www.FGG1031.com) website where you can also download my popular book entitled [*Real Estate Tax Deferral Strategies Utilizing the Delaware Statutory Trust* *(DST)*](https://pages.fgg1031.com/resources/real-estate-tax-deferral-strategies-ebook)to learn about 1031 exchanges.  ##### **Summary** The availability of depreciation deductions helps to make investing in rental properties more attractive than investing in other types of assets resulting in greater after-tax income for comparable pre-tax returns. This blog is intended to only provide an overview of basic concepts of how to take advantage of depreciation and, as you may now better understand, the topic can quickly get complex. As always, we recommend that you seek inputs from qualified real estate tax advisors when considering depreciation strategies. Please contact us for more general information on real estate tax strategies and also for referrals to knowledgeable tax professional via phone at 408 392-8822 or via email at [info@FGG1031.com](mailto:info@FGG1031.com). [Resources:](https://www.irs.gov/publications/p946) [**1**](https://www.irs.gov/publications/p946)[https://www.irs.gov/publications/p946](https://www.irs.gov/publications/p946)  2 Fees for cost studies on DSTs ranging from $500 to $1,200. have been quoted to our firm.    --- ##### **Help Save 1031 Exchanges** Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking [HERE](https://p2a.co/XLBiUYT)[**.**](https://p2a.co/XLBiUYT) --- **[![New call-to-action](https://no-cache.hubspot.com/cta/default/5468919/60c88fab-3361-40dd-9cab-769d1eb620de.png)](https://cta-redirect.hubspot.com/cta/redirect/5468919/60c88fab-3361-40dd-9cab-769d1eb620de)** ### [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Paul M. Getty is one of the most experienced 1031 exchange specialists in the United States, with a career in real estate that spans over 35 years and more than $5 billion in commercial transactions across every major asset class. His work covers single-family rentals, apartments, retail, office, multifamily, and student and senior housing, giving him a practical understanding of how different property types perform across market cycles and how investors can move between them using tax-deferred exchange strategies. As President and CEO of FGG1031 | First Guardian Group, Paul advises investors through the full 1031 exchange process, from identifying qualifying replacement properties to structuring acquisitions through Delaware Statutory Trusts (DSTs) and wholly owned real estate. His guidance covers both the compliance requirements of a valid exchange and the investment decisions that determine long-term portfolio outcomes – a combination that is difficult to find in a single advisor. Paul holds a California and Texas real estate broker license and carries Series 22, 62, 63, and 82 securities licenses as a registered representative with Emerson Equity LLC, member FINRA /SIPC. He has represented buyers and sellers across complex commercial transactions, sourced and structured debt and equity, and worked alongside nationally recognized firms including Marcus Millichap, CBRE, JP Morgan, and Morgan Stanley. Before founding FGG1031, he co-founded Venture Navigation, a boutique investment banking firm whose M&A and IPO activity generated over $700 million in investor returns. Paul holds an MBA in Finance from the University of Michigan and a bachelor’s degree in chemistry from Wayne State University. He has also completed coursework in artificial intelligence at Stanford University. He is the author of four books on real estate investing and tax deferral strategy, including Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST) and Real Estate Investing in the New Era, both available on Amazon. A frequent speaker on 1031 exchanges, DST investing, and real estate tax strategy, Paul Getty is a recognized voice for investors and advisors seeking guidance on capital preservation through tax-deferred real estate investment. ## Your Comments : This is a search field with an auto-suggest feature attached. - There are no suggestions because the search field is empty. - Latest Posts - Popular Posts [Introducing FGG Compass™: A More Disciplined Way to Evaluate DST Investments](https://blog.fgg1031.com/blog/introducing-fgg-compass) [ Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) [What Is Phantom Income in a 1031 Exchange, and How Do You Avoid It?](https://blog.fgg1031.com/blog/what-is-phantom-income-in-a-1031-exchange) [ Real Estate Investors](https://blog.fgg1031.com/blog/topic/real-estate-investors) [ 1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) [Could Your Next 1031 Exchange Do More Than Defer Taxes?](https://blog.fgg1031.com/blog/could-your-next-1031-exchange-do-more-than-defer-taxes) [ 1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) ### Categories - 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[Investing in Senior Housing October 20, 2022](https://blog.fgg1031.com/blog/investing-in-senior-housing) - [A Closer Look at the 7 Deadly Sins October 20, 2022](https://blog.fgg1031.com/blog/a-closer-look-at-the-seven-deadly-sins) - [What is a Springing LLC? October 20, 2022](https://blog.fgg1031.com/blog/what-is-a-springing-llc) ## Useful Links - Home - About Us - Blogs - Testimonials from Past Customers - Resource Center - Current Offerings Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum. This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal. Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits. IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. Securities offered through registered representatives of [LightPath Capital, Inc.](http://www.lightpathcapital.com/) Member [FINRA](http://www.finra.org/) / [SIPC](https://www.sipc.org/). FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities. Copyright 2022, All Rights Reserved, FGG1031 [![FGG_Footer_White](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/FGG_Footer_White.png?width=300&height=95&name=FGG_Footer_White.png "FGG_Footer_White")](http://fgg1031.com) 97 East Brokaw Road, Suite 350, San Jose, CA 95112 [(866) 398 1031](tel:(866)%20398%201031) [info@firstguardiangroup.com](mailto:) [![Bitmap](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2023/Bitmap.png)](https://brokercheck.finra.org/individual/summary/6470002) ## Recent Blogs - [Understanding the Difference Between Inheritance and Estate Tax August 3, 2023](https://blog.fgg1031.com/blog/understanding-the-difference-between-inheritance-and-estate-tax) - [Public or Private Real Estate? Your Investment Portfolio May Need Both July 27, 2023](https://blog.fgg1031.com/blog/public-or-private-real-estate-your-investment-portfolio-may-need-both) - [How to Use 1031 Exchange Funds to Improve Your Replacement Property July 20, 2023](https://blog.fgg1031.com/blog/how-to-use-1031-exchange-finds-to-improve-your-replacement-property) ## Useful Links - [Home](http://fgg1031.com/) - [About Us](https://fgg1031.com/about-us/) - [Blogs](https://blog.fgg1031.com/blog) - Testimonials from Past Customers - [Resource Center](https://fgg1031.com/resource-center/) - [Current Offerings](https://fgg1031.com/property-listings-directory/) FGG1031 | First Guardian Group and Emerson Equity LLC do not provide legal or tax advice. Securities offered through [Emerson Equity LLC](http://www.emersonequity.com/) Member [FINRA/SIPC](http://finra.org/) and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure: - There is no guarantee that any strategy will be successful or achieve investment objectives; - Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments; - Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities; - Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments; - Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; - Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward looking statements are never an assurance of future results. Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read and understand all of the risks associated with buying private placement securities. Investments are not guaranteed or [FDIC](http://fdic.org/) insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur. **Risk Disclosure:** Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by FGG1031 | First Guardian Group, Emerson Equity LLC, or any affiliate, or partner thereof. FGG1031 | First Guardian Group does not warrant the accuracy or completeness of the information contained herein. Copyright 2026, All Rights Reserved, FGG1031