One of the best ways to let your money work for you is to delay paying the tax man, and let those dollars keep compounding your profit. Bonus depreciation is another tool in the chest toward that end.
One of the most popular components of the Tax Cuts and Jobs Act of 2017 was 100% bonus depreciation for property placed into service after September 27, 2017.
In real estate, 100% bonus depreciation comes into play when a cost segregation study is completed. The study identifies property components with a 5, 7, 15, or 27.5-year life (residential) or 39-year life (commercial) for depreciation purposes — and property with a 5, 7, or 15-year useful life may be eligible to be written off at 100% in year one.
The Phase-Out Schedule
Under current tax law, the full 100% write-off phases out after 2022: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and back to the standard depreciation timeline in 2027.
Bonus depreciation is subject to recapture at sale, but the maximum recapture rate is 25%, and there are ways to delay recapture through a 1031 exchange or other strategies to retain as much of the tax savings as possible.
Delaying taxes down the road, especially during periods of high inflation, is an ideal way to maximize your investment return.
An engineered cost segregation study is generally recommended for properties worth $500,000 or more. For smaller properties, a lower-cost study based on machine learning can be a good option.
Especially Useful Before a Renovation
If a multifamily property is purchased and renovated after a cost segregation study, the remaining depreciable basis of any discarded assets may be written off immediately in the current year. Data from the cost segregation report can be used to support disposition tables.
If you haven’t yet considered a cost segregation study for your investment property, now is the time — before this window closes — to maximize the benefit and keep those dollars working for you.
Want to discuss your overall investment strategy? Contact us to schedule an investment review that includes both before- and after-tax returns, and can help you capture a bonus on your return year after year.
