The Power of Depreciation: How Real Estate Investors Pay Less in Taxes

Depreciation is one of the main reasons why real estate investors consistently pay less in taxes. 

Here’s how it works: 

What Is Depreciation in Real Estate?

Depreciation allows investors to deduct the cost of a physical asset over time as it “wears out,” even if it’s actually increasing in value. For real estate, the IRS assumes that buildings have a limited useful life even though we all know well-maintained properties often appreciate in value. For federal income tax purposes, the IRS allows depreciation of residential rental properties over 27.5 years and commercial properties over 39 years. What this means is that investors can deduct certain amounts in depreciation even if the property’s value is going up and it’s generating strong rental income. Depreciation can essentially reduce your net taxable income without costing you anything out of pocket.

Real Estate + Depreciation = Powerful Tax Deferral

When used correctly, depreciation allows investors to:

• Offset current rental income

• Reduce or eliminate taxable gains

• Defer taxes through tax-efficient strategies like Qualified Opportunity Zones

One thing to note is that depreciation isn’t completely tax-free but rather it is a deferral. Therefore, when the property you invest in gets sold, the IRS may require you to pay depreciation recapture tax (typically at 25%) on the amount you’ve depreciated. However, there’s good news for investors. Investors can minimize their tax liability or potentially avoid paying this altogether with Opportunity Zone investing as there is no depreciation recapture with OZs.

Two Active Sinatra & Co. OZ Funds That Leverage These Benefits

Sinatra & Shnow OZ Fund: Historic Tax Credits + OZ Advantages

Sinatra & Shnow OZ Fund combines powerful OZ benefits with Historic Tax Credits, potentially returning capital to investors earlier than most OZ investments. Co-sponsored by NFL player Dion “Shnowman” Dawkins of the Buffalo Bills, the project includes the redevelopment of three historic buildings in Downtown Buffalo into mixed-use, market-rate apartments.

Key features:

• Combines OZ tax incentives with Historic Tax Credits
• Backed by Dion Dawkins as anchor investor
• “Shnow Touch” custom upgrades like modern fitness centers
• Addresses tight housing supply in Buffalo’s urban core

This is an impact-focused, design-forward investment that also delivers a strategic tax advantage through early capital return and complete elimination of depreciation recapture.

Solmar St. Pete OZ Fund – Luxury Living, Prime Florida Market

This single-asset Opportunity Zone Fund will develop a Class A high-rise apartment building in downtown St. Petersburg, FL — one of the most sought-after real estate markets in the Southeast.

Key features:

• Full OZ tax benefits, including no tax on gains after 10 years
• Premium location in a rapidly growing urban market
• Luxury product with strong demand drivers
• Clean capital structure and long-term growth potential

For investors seeking long-term tax-free appreciation in a booming area, this fund offers a compelling opportunity to defer and eliminate gains while owning prime real estate.

Depreciation is one of the most powerful wealth-building tools in real estate. It allows investors to earn tax-advantaged income, defer liabilities, and compound wealth faster than almost any other asset class. Understanding how depreciation works and how to optimize it can make a significant difference in your overall returns.

Interested in learning more?
Schedule a call with us to learn more about how you can potentially take advantage of this key benefit by investing in our current OZ projects.