Utilizing property to reduce taxable income

[Lucas Rowell]

Hello and Good evening BP Brothers & Sisters.

Tonight I wanted to post a question I have been thinking a lot about lately. "How could an investor best utilize property to lower taxable income"?

We currently own two properties we had the good fortune of purchasing with VA loans that started as primary residences and became rentals for one reason or another. I am semi active in acquisition side of wholesale aside from having a traditional real estate team. We are working on buying additional properties for buy and hold to become FI.

-Could I accelerate depreciation on multiple properties to reduce my taxable income if the plan is buy and hold? If we did this and needed/decided to sell a property and utilized a 1041 exchange could we roll the accelerated tax implications forward while still utilizing accelerated depreciation on next property without having the tax implications of accelerated depreciation realized? Copy paste repeat?  Maybe another way of doing this? 

Just trying to brain storm some ideas, any suggestions would be warmly welcomed. : )

Cheers 

Lucas

- 

[Michael Plaks]

@Lucas Rowell

Say you have a $100k property, depreciated $30k of it via accelerated depreciation and then used a 1031 exchange to exchange it into a $120k property. (Land allocation ignored for simplicity.)

At the exchange time, the $30k does not bite you back (again, the reality is more complicated), however you cannot depreciate $120k from the new property. You can only depreciate $70k left from the old one plus $20k of the additional investment.

You can still apply accelerated depreciation to this new $90k asset, however the rules get complicated, and it's not a DIY project. And it's very important to keep in mind that the 1031 exchange rules got much more complicated after the tax reform when it comes to accelerated depreciation and cost segregation. Get good help.