Example of Bonus Depreciation

Example of Bonus Depreciation

Julio GonzalezPro Member
Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes

In my previous post, I talked about the different property classifications to help separate real property from personal property. Identifying your personal property helps you determine the portion of your building that can be expensed immediately under the first year 100% bonus depreciation deduction. I thought it might be helpful to walk through an example.

An investor buys a building for $5,000,000. The value of the land that the building is on is $400,000. Since land does not depreciate, the amount that is subject to depreciation is $4,600,000. Traditionally, the investor would expense the $4,600,000 straight-lined over 39 years. The investor decides to get a cost segregation study to determine the amount of property that is classified as tangible personal property. The results of the study show that $1,000,000 is related to tangible assets, including parking, specialty electrical, finishes, flooring, interior landscaping, etc.

Under the bonus depreciation rules, the investor is able to expense the $1,000,000 of tangible assets immediately. The results of the cost segregation study are considered significant. The study's report also allows the investor to retire and expense structural assets as they are exhausted, which can also lower capital gains when selling the property.

Are you familiar with bonus depreciation?

2Reply
127 views

Most Popular Reply

Member since 2020 · 14 posts · 6 votes
3y

I am just learning more about this. We are putting a brand new home 5/5 into service in a month or so. Could the builder break down costs? survey engineer? how much would you estimate that it would cost?

See this reply in the discussion

9 Replies

Jump to latestLatest
  • Rental Property Investor · Weslaco, TX · Member since 2020 · 59 posts · 17 votes
    4y

    Thank you Julio for the example.  I am learning about the power of bonus depreciation and cost segregation.  Hope to be able to use this strategy this year of 2022.  

  • Julio GonzalezPro Member
    OP
    Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
    3y

    @Olivia Leija Of course. Hope you found it helpful! Both are incredible tax strategies. Feel free to reach out if you ever have any questions!

  • Member since 2020 · 14 posts · 6 votes
    3y

    I am just learning more about this. We are putting a brand new home into service in a month or so. Could the builder break down costs or do we need to pay someone for a segregation study? Where do you find people to do this?

  • Member since 2022 · 88 posts · 29 votes
    3y
    Quote from @Julio Gonzalez:

    In my previous post, I talked about the different property classifications to help separate real property from personal property. Identifying your personal property helps you determine the portion of your building that can be expensed immediately under the first year 100% bonus depreciation deduction. I thought it might be helpful to walk through an example.

    An investor buys a building for $5,000,000. The value of the land that the building is on is $400,000. Since land does not depreciate, the amount that is subject to depreciation is $4,600,000. Traditionally, the investor would expense the $4,600,000 straight-lined over 39 years. The investor decides to get a cost segregation study to determine the amount of property that is classified as tangible personal property. The results of the study show that $1,000,000 is related to tangible assets, including parking, specialty electrical, finishes, flooring, interior landscaping, etc.

    Under the bonus depreciation rules, the investor is able to expense the $1,000,000 of tangible assets immediately. The results of the cost segregation study are considered significant. The study's report also allows the investor to retire and expense structural assets as they are exhausted, which can also lower capital gains when selling the property.

    Are you familiar with bonus depreciation?


     as i understand this will require RE pro status , correct ?

  • Julio GonzalezPro Member
    OP
    Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
    3y

    @Mary Kaye pepperman That's exciting! You would need a cost segregation study done into order to claim the bonus depreciation and accelerated depreciation.

  • Julio GonzalezPro Member
    OP
    Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
    3y

    @Rashid Khalil You don't need to have RE pro status to be able to benefit from a cost segregation study, it just allows you to turn your passive investments into active investments. Depending on your current income, you may be allowed to take up to $25,000 in passive activity losses per year without RE pro status.

  • Katy, TX · Member since 2019 · 13 posts · 4 votes
    3y

    @Julio Gonzalez. Thank you for the example and feedback to the questions above. I have a few follow-up questions as well. I have raised a syndication fund recently and will be purchasing several SFH as part of that fund. The plan is to purchase, rehab, rent out and stabilize those properties and then in 3-5 years sell them as turnkey properties. The rent during the intervening years and the proceeds of the sales will then be distributed to the LPs and GP (myself) based on agreed waterfall percentages establish in the operating agreement of the LLC for this fund. None of the LPs in the fund are real-estate professional and they are all highly compensated director and C-level executives that are in the upper tax brackets from an income perspective. I have done hard money fixed interest types of funds in the past, but these individuals are looking for a way to participate in more of the tax saving that comes from owning property verses just getting a fixed return that is taxed as income at 30-40% when they get paid. So if I run a cost segregation study to do bonus deprecation would they be able to make use of those write offs in the early years of this fund? Since the properties will be owned longer than one year will the sale be taxed as capital gains or income when they receive distributions from the LLC? If they wanted to make use of the 1039 exchange to again avoid taxes is that something I can do for them via the LLC or does each individual need to do a 1039 based on their individual gains from the LLC? Finally, for as far business entity structure is concerned, where tax efficiency for the LPs is one of the key selling points, is there an advantage or preference for LLC, verse S-corp, verse C-corp? Sorry for the barrage of questions but just looking for some guidance as I move away from my previous experience doing simple hard money into more of this LP/GP equity arrangement.

  • Member since 2020 · 14 posts · 6 votes
    3y

    I am just learning more about this. We are putting a brand new home 5/5 into service in a month or so. Could the builder break down costs? survey engineer? how much would you estimate that it would cost?

  • Julio GonzalezPro Member
    OP
    Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
    3y

    @Mary Kaye pepperman A cost segregation study company would assist you with this. A single family home may cost about $3-5k for the study.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.