What is bonus depreciation and could it be coming back?

The House recently passed H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, which includes 100% bonus depreciation.

What is bonus depreciation? Normally residential properties are depreciated over 27.5 years. You take the value of the building minus the land, divide this by 27.5 and you write this off on your taxes This is called straight-line depreciation. This is what most landlords and single-family property owners do, however there are other options.

You can do what is called a cost segregation study. This is done with a specialized firm with both engineering and accounting expertise. They analyze the property and figure out how long all of the components of the property are going to last and they break them down into 5, 7, 15 and 27.5 year buckets. This allows you to deduct those sections of your property much faster, thus giving you larger tax write-offs in the earlier years. The reason we don’t typically see this with smaller properties is because these studies are fairly expensive and don’t make financial sense unless the purchase price is fairly large. Yet another benefit of the scale of syndication.

Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the rules for bonus depreciation by allowing businesses to immediately write off 100% of the eligible cost of the property, those that fall into 5, 7 and 15 year buckets. The 100% write-off of eligible property costs expired December 31, 2022. Unless the law changes, the bonus percentage will decrease by 20 points each year for property placed in service after December 31, 2022 and before January 1, 2027. The phase-out schedule is as follows: 2022: 100% 2023: 80% 2024: 60% 2025: 40% 2026: 20% 2027: 0%. Please keep in mind that there are rules to how you can use these deductions, be sure to speak to your CPA.

One of the most important considerations to investing is the time value of money. If you can lower your taxable income that frees up more money that you can use to invest, furthering your investing goals. As you can imagine this reduction in bonus depreciation significantly impacts the amount you can deduct. This is why H.R. 7024, the Tax Relief for American Families and Workers Act of 2024 is so important. It will bring back 100% bonus depreciation, thus giving you, the investor, more money to invest this year.

If this is important to you write your senator and ask them to support H.R. 7024, the Tax Relief for American Families and Workers Act of 2024.