Recently I did a webinar with a real estate investor who was mesmerized at the idea of 100% bonus depreciation and cost segregation.
After seeing and hearing his demeanor and excitement, I knew I had to spread the word to other real estate investors. And what better time to do so than now? With the 2018 tax filing season underway, many might wonder how Tax Cuts and Jobs Acts (TCJA) of 2017 will affect their filing.
With bonus depreciation being an avenue reformed in the TCJA, it is important for you, the investor, to understand what this means, especially if you’re considering doing a cost segregation study anytime soon.
Don’t have a clue what bonus depreciation is general? Or better yet, 100% bonus depreciation?
Bonus depreciation was passed shortly after September 11, 2001 as an economic stimulus. The purpose was to entice Americans to invest in real estate.
Previously, bonus depreciation allowed a taxpayer (of only a new property) to write off a portion of an eligible asset (with a life less than 20 years), in the year it is acquired. With the recent Tax Credit and Jobs Act of 2017, bonus depreciation was generously extended from 50 to 100% and not just for new property, but used as well!
To qualify for 100% bonus depreciation, assets must have a tax recovery period of 20 years or less. Also, property must have been acquired and closed escrow after September 27, 2017 and before January 1, 2023. For properties placed in service post 1/1/2023, the amount of bonus depreciation allowed will decrease. Check out the bullet points below for more details.
Property placed in service 2023 = 80%
Property placed in service 2024 = 60%
Property placed in service 2025 = 40%
Property placed in service 2026 = 20%
It is clear that taking advantage of bonus depreciation can potentially bring significant tax savings. Cost segregation is a critical component for capturing bonus depreciation, as a study will be able to determine which assets will qualify for 100% bonus depreciation.
For a deeper dive into how cost segregation works, check out our eBook, IRS Cost Seg Audit Techniques Guide - Simplified: