100% Write Off First Year

6 Replies

Here is a scenario I would like some Intel on from somebody more educated on the topic than myself.

W2 Employee in the 35% tax bracket, purchased an apartment complex in 2019 for $2.5mm under and LLC. You value add the property, increase NOI and sell it for $3.2mm a year later.

Can you take the full property deduction in 2019? If so, does this also have an effect on your personal taxes as well (will it reduce my adjusted gross income?)

The idea would be to take the full depreciation year one, sell it the following year and 1031 the gain into another property.

Thanks for the guidance!

"Can you take the full property deduction in 2019?"

You can't deduct a newly purchased building 100% in the first year. It must be depreciated over 27.5 years for tax if it's a traditional long-term lease apartment complex.

"If so, does this also have an effect on your personal taxes as well"

If you're a W-2 employee, chances are you won't qualify as an RE professional.  Therefore, any losses from the apartment complex would be passive in nature and would not be able to offset W-2 income -- they can only offset passive income.

@Nicholas Kitchen

You can’t expense a building in full. However, you can do a cost segregation study and certain assets can be expended in full under bonus depreciation for example, resulting in several hundred thousand dollars of depreciation expense in year one. This depends on the results of the study.

Passive losses are not your only problem. A 1031 exchange is limited only to "real" property or 1250 property. In order to "bonus" property via a cost segregation, the bonus would be limited to the 1245 property or all property under 20 years. So to use your example, you would be able to "bonus" approx $625,000 the first year. Not bad. That is until you sell it a year later and have have to recapture most of that $625,000 as ordinary income. Cost Segregation is a tool that is best used when holding a property between 10-15 years. After that time new purchases, 1031 exchanges, or remodeling is necessary.

If you are going to "flip" a property, the higher the cost basis the better. Just make sure that you qualify for long-term capital gains. 

You did not mention whether you were married or not. This can make a difference in the calculation, as a spouse can qualify as a "real estate professional" turning any real estate losses into active losses to offset your high W2 wages. However, you still have a "recapture" issue if you flip it.

Hope this helps


Originally posted by @Nicholas Kitchen :

Okay awesome thank you all for the responses! So is it different if you have a quad? I just keep reading about all this "deduct 100% first year" stuff..

You never get to deduct a building in one year. 

It's always depreciated. 

It can have 1 unit, or 500. 

As others said the only way to deduct more in year 1 (still not 100%) is cost segregation. Which technically breaks out lots of systems from being a "building" Now you have lots of asstes that aren't technically real estate. They're electrical systems, flooring, ect. 

What you're reading about for 100% deduct in year 1 is bonus deprecaiton most likely. It applies to things with a life of under 20 years. A Building has a life of 27.5/39 so it doesn't qualify. Some small things can be broken out, and those would. But it's only a few items. The way you'd break out more to qualify is that cost seg.