BONUS Depreciation, why you should care!

BONUS Depreciation, why you should care!

Over the last several weeks, I’ve spent time educating you on the tax benefits of apartment investing. We’ve spent time understanding depreciation, what a cost segregation study is, and how apartment investing gives you more tax benefits than other asset classes.

There is one more term you need to know!  BONUS DEPRECIATION.

This is an accelerated form of depreciation that allows for you take advantage of 100% of the depreciation in the first year of ownership. This is a HUGE benefit!

The Tax Cuts and Jobs Act, enacted at the end of 2018, increased first-year bonus depreciation to 100%. It went into effect for any long-term assets placed in service after September 27, 2017.

The 100% bonus depreciation amount remains in effect from September 27, 2017 until January 1, 2023.

After that, first-year bonus depreciation goes down as follows:

  • 80% for property placed in service after December 31, 2022 and before January 1, 2024.
  • 60% for property placed in service after December 31, 2023 and before January 1, 2025.
  • 40% for property placed in service after December 31, 2024 and before January 1, 2026.
  • 20% for property placed in service after December 31, 2025 and before January 1, 2027.

This year is the last year that you can get 100% bonus depreciation in your first year of ownership.

This doesn’t mean that tax benefits associated with real estate are going away. You will still be able to take depreciation, it just won’t be upfront in that first year of ownership, it will be spread over the next several years.

Many people utilize tax loss harvesting as a strategy to reduce yearly taxes. For those investors that are interested in harvesting your tax losses, you should invest asap!

Cost Segre-WHAT???

Cost Segre-WHAT???

Recently, I talked about DEPRECIATION.

Today, I’ll cover why there is more depreciation with apartments than other asset classes, and how we determine the depreciation amount.

Two words: Cost Segregation

A cost segregation study is a detailed study of the cost components of the apartment building that looks at each element of a property, splits them into different categories, and allows you to benefit from an accelerated depreciation timeline for some of those building components.

This type of study is conducted by a specialized firm, usually a team of tax advisors and engineers, working together to decide which components of a building should go into each category, and how much each element costs on its own.

So why do apartments give you more depreciation?

Let’s compare a self-storage building versus an apartment building.

The self-storage building has very basic components, metal frame, roof, and a possible air conditioning unit.

Now let’s think about the apartment complex components. In a 200 unit apartment building, we have 200 bathtubs, 200 plumbing fixtures, 200 kitchen cabinets, 200 carpets/floor, and so on and so forth.

There are a lot more components which essentially equates to more depreciation!!

Ok, we’ve established we need depreciation to take advantage of the tax benefits, AND we get more depreciation with a cost segregation study.

We’ve also discussed why apartment investing translates into more depreciation than other commercial asset classes.

Next time, I’ll cover BONUS DEPRECIATION and why you should care about it!

What in the world is Depreciation?

What in the world is Depreciation?

Two things that are guaranteed in life are death and taxes! Sound familiar?

Taxes are our biggest expense.

One important way to build your wealth is to create strategies to minimize taxes.

It’s important to know that you can indeed decrease your taxes with certain investments.

In general, whenever you make money, you are typically taxed on that money.

For example, if you own a dividend stock, you will be taxed on the dividend you received as a distribution. Even if your money is sitting in a savings account, and you make an interest rate of 0.01%, you will be taxed on that income.

 

How does real estate investing provide tax benefits?

Now I am not a CPA or attorney, but you’ve heard me talk about the benefits of real estate investing and how one of the most powerful of those benefits are the tax advantages.

Do you know how those tax advantages work?

One word. DEPRECIATION

So what exactly is that? Well, The Oxford Dictionary defines depreciation as “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”

Depreciation is an accounting method, allowed by the IRS, of allocating the cost of a tangible asset over its useful life to account for declines in value over time.

Ok, but what does that mean in layman terms?

On a very basic level, you are telling the IRS that your asset is losing value, even if it is cash flowing AND appreciating in value. You’re doing this legally! These are essentially phantom losses.

When you invest in an apartment syndication, you are a fractional owner of a multimillion dollar property. Every tax year, you will receive a K-1 Tax form that will claim either gains or losses.

Below is an actual  K-1 from one of my investments. You can see that I invested $50,000 and received a loss of -$49,001 for that year.

This passive loss can offset any future distribution I get from this real estate investment or any other passive investments, meaning I don’t pay taxes on my gains unless they are more than $49,001.

If I don’t use it in one calendar year, then I can carry it forward until I can use it!