Can I Accelerate Depreciation and Amortization?
The old adage “nothing in life is certain but death and taxes” has been around a long time for a reason. In the United States, most taxpayers dread preparing their state and federal taxes each year out of fear that they will owe a small fortune. Understandably, those same taxpayers are always looking for ways to decrease their taxable income and/or apply credits to the amount of taxes owed. If you own certain types of assets, you may wonder “Can I accelerate depreciation and amortization?” in an effort to reduce your tax liability. The answer is “possibly.”
First, it helps to define the terms. According to the Internal Revenue Service, or IRS, depreciation is “the annual deduction that allows you to recover the cost or other basis of your business or investment property over a certain number of years.” Amortization is “the distribution of payment into multiple cash flow installments, as determined by an amortization schedule.” The most common use of an amortization schedule is a home mortgage. Repayment of the loan is amortized over the life of the loan, with each payment consisting of both a principal and interest.
When an asset is depreciated, for purposes of computing taxes, it means that a portion of the purchase price of the asset, or value of the asset, is claimed as a deduction each year for the life of the asset—or for a set period of years, depending on the asset. Accelerated depreciation allows a taxpayer to claim a higher deduction early on in the life of the asset on the basis that an asset’s usefulness will be higher during the early years of the asset’s life.
Both depreciation and amortization are often used when referring to real property. Rental property, for example, can be depreciated. Depreciation begins on the first day the property is ready and available for rent and ends when you have fully recovered your basis, or when you stop renting the property. The IRS has very specific rules that apply to the depreciation of real property. In many cases, you will be able to accelerate depreciation. However, it is imperative that you consult with an experienced real estate attorney to determine what depreciation system the IRS requires you to use for your rental property.
Accelerated amortization is a simpler concept. When you accelerate an amortization schedule, it means you make extra payments toward the balance owed, reducing the overall amount you pay in interest during the life of the loan. It is important, however, to understand the terms of a loan as pre-payment, or accelerated amortization is sometimes not allowed under the terms of a loan. Again, having an experienced real estate attorney review your loan documents will ensure that you fully understand all of the terms.
If you have specific questions regarding accelerated depreciation or amortization of real property in Pennsylvania, contact the real estate law attorneys at Curley & Rothman, LLC by calling 610-834-8819 today to schedule your free consultation.