1031 vs Bonus Cost Segregation Depreciation.

[Pratik Sheth]

Please help me convince as which one is better to offset capital gains. 1031 Exchange or Bonus Cost Segregation Depreciation? Also, I am a California Resident so I heard I cant use Bonus Cost Segregation Depreciation for CA stage? Is it still worth doing it? Planning to invest in syndication investments and want to evaluate pros and cons of each of them?

What are Pros and Cons of each?

[David Lilley]

@Pratik Sheth it is not a one or the other situation. On every property we buy we immediately do a cost seg study and take the bonus depreciation in year 1. With bonus depreciation we typically get $1 of depreciation for every $1 invested, so if you had $100,000 of equity into a multifamily property, you would get $100,000 in depreciation year 1.

As Real Estate Professionals, we do this to shield all of our ordinary income from being taxed. If you do not qualify as a Real Estate Professional, then your passive losses (depreciation) can only offset your passive gains.

At the end of the hold period we always 1031 Exchange into the next investment to defer taxes on our capital gains and avoid depreciation recapture. Then, we complete another cost seg study / bonus depreciation and the cycle starts over again.

If you are not holding the asset for at least a year then you cannot 1031 exchange and taking bonus depreciation would not be advised. If you intend to own the asset less than 3 years and do not intend to 1031 Exchange out of the investment then it is probably not worth it in that case either.