While much of the media attention has focused on the political drama surrounding its passage, what really matters is how these changes impact your personal financial and real estate investing needs.
The big changes that affect Real Estate Investors like you
Bonus depreciation is back!
This is something that many of you have been waiting for, and for all purchases after January 19, 2025, you get 100% bonus depreciation for certain qualified “personal property.”
What qualifies for bonus depreciation? Property which has a useful life of 20 years or less.
If you are new to buying properties, and are not sure what these means, that is okay. My job is be your advisor, to keep you abreast of the most important legal aspects you need to know to gain every advantage available to you.
When you buy real estate, you get to depreciate the purchase price over a period of years. For residential property, that number is 27.5, and for commercial real estate, that number is 39.
So you take the purchase price, deduct out the value of the land, and then take the remaining amount and divide it by either 27.5 or 39. That is how much money you may deduct on your tax return every year for either 27 or 39 years.
But now, as a bonus, you may deduct 100% of personal property that has a life less than 20 years. Think: window blinds, kitchen cabinets, light fixtures, ceiling fans, appliances, Heating and cooling systems, computer software.
How to use Bonus Depreciation to your advantage
When you buy a new property for your portfolio, seek to utilize the 100% bonus depreciation. How?
You need real estate that comes with a large amount of personal property. Then, hire a company to perform a cost-segregation study. There are companies that specialize in these studies, and they are a combination of engineer and accounting reports. Next, you will need to shop real estate assets that contain these elements. There are several ways to go about this.
One way is to look at properties that would make good short-term rentals. You will be able to take bonus depreciation on the furniture and other property inside the unit. You can either buy the furniture and fill it up; or you can buy a property that alway contains furniture and utilize bonus depreciation on the existing property. This latter strategy is the better, since you can wrap everything into the purchase price, finance the purchase price, then deduct the furnishings and equipment. Even if the furnishings are old, you will get the benefit of a deduction as if you bought them brand new.
Car Wash properties are also good candidates for bonus depreciation, since they come with all sorts of equipment. As with short-term rentals, the goal is to purchase the property with existing equipment, so it gets wrapped into the purchase price which can be financed. Then, using your cost-segregation study, you will itemize each piece of equipment, assign a value, and then take the deduction in the first year.
Last, this strategy can be of great benefit when purchasing properties with multiple units. You will see a big difference here when compared to single-unit properties. That’s because each unit will contain furnishings, fixtures, and equipment. Therefore, you can scale out the application of your bonus depreciation. The more units, the more you will deduct.
The cost-seg study will break down all depreciable property for each unit. Yes, you can even do these on single-family homes, but you will see the biggest return on multi-unit properties.
Hand the report over to your account for use on your next tax return, and you will see a larger than normal deduction due to the bonus depreciation.
Moving forward
Tax Planning is just one aspect of our Life & Legacy Planning Sessions, where we discuss all aspects of estate planning and business succession planning. If you’d like to book a LLPS this coming month, let me know or jump on a 15-minute call to discuss.
Travis Charles Smith is an attorney in Oklahoma City who works with real estate investors by handling contracts, leases, LLC and corporate formation, business succession planning, and litigation such as quiet title, evictions and foreclosures. Travis also helps families who want to preserve their wealth.