Commercial Properties: Longer Depreciation and Different Rules

Commercial properties depreciate over 39 years instead of 27.5, affecting cost segregation strategy and depreciation recapture calculations.

Depreciation is 39 years -- but cost segregation changes the math. Nonresidential real property depreciates over 39 years under MACRS, making the annual deduction per dollar of basis smaller than residential. However, commercial buildings typically have more components that can be reclassified to 5, 7, or 15-year property through cost segregation -- HVAC systems, specialized electrical, parking lots, and landscaping. A study on a $2 million commercial building can often reclassify 30-40% of the cost.

Triple-net leases simplify operations but shift tax reporting. In NNN leases, the tenant pays taxes, insurance, and maintenance. Your income reporting is simpler, but you still depreciate the building and must track tenant improvements that revert to you at lease end.

Tenant improvement allowances create basis questions. When you fund tenant build-outs, those costs are generally depreciable to you. Under Section 168(k), qualified improvement property placed in service may be eligible for bonus depreciation, which can generate a large first-year deduction.

Qualified business income deduction applies. Commercial rental income generally qualifies for the 20% Section 199A deduction, subject to income thresholds and the W-2 wage/property basis limitations.

The tradeoff: Commercial real estate produces bigger deductions per dollar invested but requires a CPA who understands the interplay between cost segregation, tenant improvements, and the longer depreciation schedule. The stakes per property are higher.