Optimal rental property purchase to utilize Bonus Depreciation

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Optimal rental property purchase to utilize Bonus Depreciation

Chaz T Johnson
Member since 2018 · 7 posts · 5 votes

I am trying to determine what the best strategy is to utilize the 100% bonus depreciation for rental properties. What property types/ number of units/ remodel or not give me the best chance to have a high percentage of the property be classified as personal property for bonus depreciation in a cost segregation study? 

I am a physician and my wife is a realtor, actively participates in real estate. My student loans are 10% of our adjusted gross income. My goal is to lower my AGI as much as possible to lower my student loan repayment. My plan is to buy rental properties and do a cost seg to take advantage of the 100% bonus depreciation. This will lower my student loan payments for that year significantly. 

In peoples experience how should I best spend my money in real estate to get the highest bonus depreciation? Since it is mainly things like furnishings and appliances would it make more sense to buy a 4-plex vs a SFH? Does anyone know how much personal use property percentage is in a typical SFH vs 4-plex? Would I be better off buying a fixer upper and spending money on updates? Should my strategy be to spend on of out capital on the down payment to buy a more expensive rental with a large cost basis?

Not sure of the above terms are used correctly... Thanks for the input

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  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Chaz T Johnson sounds like you have the right scenario, having your spouse qualifying as a real estate professional. Make sure that she qualifies with the hours for materially participating in the real estate activity on your properties, in order to be able to claim those losses as non-passive.

    That being said, believe it or not the top two property types for bonus depreciation are Mobile Home Parks and Golf Courses, because they are mainly 'land improvements' that depreciate on a 15-year schedule and qualify for 100% bonus depreciation.

    But it sounds like you are more interested in SFR or small MF, the larger cost basis, will proportionately give you more depreciation. Typical percentages of reallocation to faster depreciation lives (although will vary from property to property) are between 15-35%. I hope this helps. Let me know if you have any other questions.

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  • Chaz T Johnson
    OP
    Member since 2018 · 7 posts · 5 votes
    6y

    @yonah Wiess I never even thought of a mobile home park. That is a great idea. In your experience would doing a cost seg on a SFR be cost efficient? Or would it make more sense to have a large unite property?

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  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Chaz T Johnson The benefits are proportional to the purchase price. I usually don't recommend doing it on anything less than $500K, but there are those on here who would try to sell you, and argue with that. SFR have some of the least benefit, usually around 15-20% reallocation to faster depreciation.

    Let's do the math 20% of ($500K minus land, let's say 20% to land leaves you with) $400K depreciation basis. 20% of that equals $80,000 of extra depreciation write-off. Taking all of that in the first year would be great, probably worth spending a few thousand dollars on. As you get less than that, the benefits are proportionally less.

    *I made a lot of assumptions here for illustration purposes only.

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