“How much will I save in taxes this year if I buy real estate?”

[Melanie Baldridge]

Here's a framework for how buying property can create more tax efficiency for you.

The 6 levers of depreciation:

Lever 1 = % of Land:

One of the components of a property is land.

Land is NOT DEDUCTIBLE, so low value land properties mean more tax deduction.

A value of your overall purchase will be assigned to the land or lot.

You receive no near-term tax benefits for buying land.

For example, if you buy a $2 MM industrial building outside a rural town on 5 acres, the land value could be $5k an acre.

The land represents ~1% of the purchase

On the contrary, if you purchase a $2 MM shack in Manhattan on a postage stamp lot, the land could represent 99%

Lever 2 = % of the property with a shorter useful life.

Not all parts of a piece of real estate are depreciated at the same speed.

Certain personal property assets have SHORTER lifespans in the eyes of the IRS vs the standard 27.5/39 year lives.

This means bonus depreciation.

Properties with tons of this often have:

- Over-developed land sites (hardscaping, pools, retaining walls)
- Fancy Fixtures
- Fancy Furniture (STRs!)
- Lots of Equipment (R&D Facilities, Car Washes)
- Gas Stations (100% 15 year properties)
- Movable walls (self storage)

Many find that anywhere from 15-35% of the purchase price of a typical apartment complex is this type of property.

More of it means less tax for you from higher depreciation amounts.

Lever 3 = % of Leverage:

This is a big one!

The more leverage (debt) that is applied to a property or deal, the more cost savings you will get up front relative to the equity you put in.

Let's say you buy a $10 MM dollar deal that has $3 MM of year one depreciation.

If you used $7M of bank debt and only $3M of equity, your year 1 deduction could equal the amount of money you put into the deal!

If you had used cash for the full $10M, you would get a deduction worth 30% of your investment.

(remember, more debt = more risk)

Lever 4 = % Tax Rate

Another HUGE consideration.

Depreciation is a deduction that you are allowed to take at your Marginal Tax Rate. Similar to a 401k, part of the strategy is a tax arbitrage.

It is a much better outcome to take the deduction at 37% rather than 24%.

Lever 5 = % Bonus Allowed:

In 2025 bonus depreciation is 40% and will continue to ramp down 20%/yr unless the laws change.

Bonus depreciation has come and gone in the past, but the more you get, that first year payback is higher and higher.

Lever 6 = % Payback Ratio

Ultimately how much you save vs. how much you pay matters.

We use virtual site visits on 90%+ of our projects to save time and money, and our engineers produce great work!

Caveat - Talk to your CPA before you purchase a cost seg study.

You need to have a way to monetize your losses through

1. Being a Real Estate Pro
2. Having Passive income you can offset
3. Using the STR (or carwash, etc..) Loophole

Don't cost seg if you can't use the losses!