Electing out of bonus depreciation by asset class
Thanks to the OBBBA, bonus depreciation is back to 100% for assets with a class life of 20 years or less acquired and placed into service after January 19th, 2025. That’s good news, right? As always, this depends on the individual taxpayer/RE investor facts and circumstances. It’s good news for RE investors generating enough income from building assets to offset the large loss (tax deferral) created by accelerating depreciation (i.e., correctly classifying these assets through cost segregation studies as Section 1245 Tangible Personal Property and Section 1250 Real Property). Any suspended/unused loss resulting from a study can be carried forward indefinitely, so what’s the big deal? There could be foreseen or unforeseen circumstances where bonus depreciation may not be fully absorbed before selling the assets (e.g., short-term hold on a large multifamily complex with low or fluctuating occupancy rates). Fortunately, taxpayers can elect out of bonus depreciation by asset class (e.g., 5-year, 7-year, and/or 15-year) in writing in accordance with §168(k)(7). A huge caveat is that once the taxpayer elects out of bonus depreciation by asset class, the taxpayer cannot elect back in with the same assets (e.g., carpet, flooring, cabinets, etc.) within the same asset class. However, if/when the assets in the same asset class elected out of are replaced, the new assets within the same asset class are eligible for bonus depreciation. Electing out of bonus depreciation for 5-year and/or 7-year class assets recaptured at the ordinary income tax rate and taking bonus depreciation on 15-year class assets recaptured at a maximum 25% tax rate instead, could minimize the impact (amount) of depreciation recapture upon sale.
Related posts:
https://www.biggerpockets.com/forums/51/topics/1295322-once-again-cost-segregation-hype#post_7249283
https://www.biggerpockets.com/forums/51/topics/1295750-cost-segregation-and-depreciation-recapture
https://www.biggerpockets.com/forums/55/topics/1251695-cost-segregation-pros-and-cons
https://www.biggerpockets.com/forums/51/topics/1244026-depreciation-recapture-strategies-for-2025
Disclaimer: This is not tax advice.