The Tax Deductions Hiding on Your Depreciation Schedule

For many commercial real estate owners, the depreciation schedule is a document that exists somewhere behind the tax return and rarely gets much attention.

But that schedule can tell an important story.

A detailed tax depreciation schedule shows when assets were acquired, how they were classified, how much has already been depreciated, and what basis remains. For owners with significant real estate holdings, it can also reveal tax questions worth revisiting.

In a recent episode of the Prestige Perspective podcast, Mark Clark, CFP®, CKA®, sat down with Eric Wallace, CPA, to discuss something that is often overlooked: the Tangible Property Regulations, or TPRs — the IRS guidelines that dictate whether property expenses must be capitalized or can be immediately deducted.

Cost Segregation Is Only Part of the Picture

Most commercial real estate owners are already familiar with cost segregation, which can reclassify portions of a building into shorter depreciation periods and accelerate certain deductions.

But Eric made an important distinction:

Cost segregation is optional. Compliance with the TPRs is not.

TPRs address expenditures made after a property is acquired, including roof replacements, HVAC systems, parking lots, renovations, and tenant improvements. Depending on the facts, those expenditures may need to be capitalized or may qualify for different treatment as repairs and maintenance.

That makes one question especially important:

How were major property expenses classified, and why?

A $9 Million Example

Eric shared an example involving a large real estate investment fund that had accumulated approximately $9 million in expenditures on an apartment property over several years.

According to his review, roughly $8 million of that was misclassified, and should not have been capitalized under the TPRs.

While that is an unusually large example, it demonstrates how the classification of an expenditure can affect when a deduction is available and potentially how an asset is treated later when the property is sold.

Eric also described a roof replacement where, after reviewing the depreciation history and applying the appropriate accounting-method process, roughly a $300,000 immediate deduction could potentially be identified instead of continuing to depreciate the expenditure over decades.

Not every property owner will have six- or seven-figure deductions waiting to be found, but the depreciation schedule may contain information that deserves a second look.

What Happened to the Assets You Replaced?

Renovations create another common issue. Owners naturally focus on what was added: new flooring, lighting, HVAC systems, or tenant improvements.

But what happened to the assets that were removed?

Eric discussed a boutique hotel renovation where the treatment of demolished property components became an important part of the analysis. In certain situations, a partial asset disposition may allow the remaining basis of a removed component to be addressed rather than leaving that asset on the depreciation schedule while also adding its replacement.

If you have substantially renovated or repositioned a property, it is worth asking whether both what went in and what came out of the transaction were considered.

Timing Matters

Eric also emphasized what he described as a “use it or lose it” issue.

Certain accounting-method errors cannot simply be corrected years later by amending an old tax return. Depending on the circumstances, correcting the treatment may require a formal change in accounting method, including IRS Form 3115.

That makes timing particularly important before:

• Selling a property
• Completing a major renovation
• Changing ownership
• Making significant estate-planning decisions

Questions to Ask Your Tax Team

You do not need to become an expert in depreciation rules to know which questions are worth asking your CPA. Mark and Eric recommend starting with:

• Do I have a detailed tax depreciation schedule for each property?
• What major improvements, replacements or renovations have we made over the years
• Are any assets still being depreciated even though they were removed or replaced?
• How were major repairs and renovations classified—and were the Tangible Property Regulations considered?
• Were partial asset dispositions evaluated when old building components were removed during renovations?
• Do I have an upcoming sale, renovation, ownership change or estate-planning decision that makes a review especially timely?

You can bring in specialized expertise without replacing your current CPA. Often, the best approach is collaboration: putting the right expert in the right position and allowing that expertise to support the broader tax and financial plan.

Sometimes the most valuable planning question is simply:

What should we ask that we may not be aware of?

At Prestige Advisors, no single tax strategy is the perfect answer for every client. Our goal is to understand the full picture, identify which opportunities actually apply, and, if the situation requires, bring the appropriate specialists to the table.

Sometimes the greatest planning opportunities begin with recognizing what you do not know — and bringing the right specialists to the table before an opportunity is missed. Send us an email at hello@prestigeadvisors.com or schedule a free conversation today!

Watch the full Prestige Perspective conversation with Eric Wallace, CPA here.

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Disclosure: This content is for educational and informational purposes only. It does not constitute investment, financial, tax, or legal advice, and nothing here should be interpreted as a recommendation to buy or sell any security or pursue any specific strategy. All investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. Tax laws are complex and apply differently to each person’s situation. Consult your own qualified tax, legal, and financial professionals before making any decisions.