Making the Most of Bonus Depreciation

My Dad always said, “Don’t work for money, let your money work for you.”

One of the best ways to let your money work for you is to delay paying the tax man, and let those dollars work to increase your profit. Bonus depreciation is another tool in the chest to that end.

  • One of the most popular components of the Tax Cuts and Jobs Act of 2017 was to establish 100% Bonus Depreciation tax write offs through 2022. This comes into effect for property placed into service after Sept. 27, 2017. 
  • In regards to real estate, 100% bonus deprecation comes into play if a cost segregation study is done. Identified within the study is property that is separated into 5, 7, 15 or 27.5 year life (residential) or 39 years (commercial) for depreciation purposes. 
  • Property that is 5, 7, or 15 year useful life may elect to be taken as a 100% bonus depreciation write off in year one. 
  • However, 2022 is the last year for the full 100% write off to be taken, as of current tax law. In 2023, it will phase out to:

                                                  2023- 80%

                                                  2024- 60%

                                                  2025- 40%

                                                  2026- 20%

                               2027- back to standard timeline of 5,7,15, 27.5 or 39 years for the tax write offs.

  • While bonus depreciation is subject to recapture at sale, the maximum recapture rate is 25%, and there are many ways to delay the recapture through 1031 or other measures to retain as much tax delay and savings. 
  • Delaying taxes down the road, especially in times of high inflation as we are seeing in 2022, is an ideal way to maximize your investment return.
  • An engineer cost segregation study is recommended if you have a property worth $500,000 or more. For properties less than this amount, a lower cost study that is done based on machine learning can be an option. 
  • TIP: A Cost Segregation can be especially helpful if planning a renovation:

                If a multifamily property was purchased and renovated after a cost segregation, the remaining           depreciable basis of the discarded assets may be immediately written off in the current year. Data generated by a cost segregation report can be used to produce and support disposition tables.

  • In Summary, if you have not yet considered a cost segregation for your investment property, now is the time to do so before the end of 2022 to maximize the benefit and keep those dollars working for you. 

Want to discuss your overall investment strategy to maximize your return? Contact us to schedule a investment review which includes both before and after tax returns and can help you get a bonus on your return year after year. 

-Sources: MadisonSpecs.com and IRS.gov

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