Recently, I talked about DEPRECIATION.
Today, I’ll cover why there is more depreciation with apartments than other asset classes, and how we determine the depreciation amount.
Two words: Cost Segregation
A cost segregation study is a detailed study of the cost components of the apartment building that looks at each element of a property, splits them into different categories, and allows you to benefit from an accelerated depreciation timeline for some of those building components.
This type of study is conducted by a specialized firm, usually a team of tax advisors and engineers, working together to decide which components of a building should go into each category, and how much each element costs on its own.
So why do apartments give you more depreciation?
Let’s compare a self-storage building versus an apartment building.
The self-storage building has very basic components, metal frame, roof, and a possible air conditioning unit.
Now let’s think about the apartment complex components. In a 200 unit apartment building, we have 200 bathtubs, 200 plumbing fixtures, 200 kitchen cabinets, 200 carpets/floor, and so on and so forth.
There are a lot more components which essentially equates to more depreciation!!
Ok, we’ve established we need depreciation to take advantage of the tax benefits, AND we get more depreciation with a cost segregation study.
We’ve also discussed why apartment investing translates into more depreciation than other commercial asset classes.
Next time, I’ll cover BONUS DEPRECIATION and why you should care about it!