Question: How do I take advantage of the new 100% Bonus Depreciation tax benefit for my rental property?
Answer: You’ve probably heard that the tax provisions in the recent One Big Beautiful Bill Act brings back 100% bonus depreciation and how much this excites investors. Is this a windfall for all investment property owners? Who benefits? Let’s look past the headlines and dig into what 100% bonus depreciation means and who benefits.
I got input from my CPA, who I highly recommend, Matt Bormel of Bormel, Grice, and Huyett on the important details of 100% Bonus Depreciation. If you have questions about how you can take advantage of the new tax policy or would like general tax support, you can reach Matt by email at [email protected].
What is 100% Bonus Depreciation?
Depreciation is a cornerstone tax benefit for real estate investors, allowing the deduction of real estate assets/components over its useful life. For residential investment properties, owners are allowed to depreciate the value of the home in equal amounts over 27.5 years (referred to a straight-line depreciation).
Bonus depreciation turbocharges this by enabling the immediate deduction of qualified assets in the first year, greatly accelerating tax savings.
Qualified assets typically include components within a property that depreciate quicker than the overall structure, such as:
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Appliances
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Flooring
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Cabinets
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HVAC systems
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Landscaping and exterior improvements
What Qualifies for 100% Bonus Depreciation?
Land never qualifies for depreciation and the structure of a home (the “building”) does not qualify for bonus depreciation (depreciates over the aforementioned 27.5 years), but many components of the home do, as noted above.
There are two simple ways of categorizing how you can benefit from 100% bonus depreciation:
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If you own an investment property and put a qualifying component in-service after January 19 2025, it qualifies for 100% bonus depreciation and will be deducted, like an expense, in year one.
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If you purchase an investment property after January 19 2025, all qualifying components can receive 100% bonus depreciation treatment, but you need to perform a cost segregation study.
A cost segregation study is performed by professionals who analyze the property, classifying each component into shorter depreciation periods (5, 7, or 15 years) and assigning a value. It is highly detailed and meets specific IRS requirements.
Cost segregation studies cost thousands (or more, for larger properties) and are often too expensive to justify for a residential investment property. Yes, like most things, you can do one yourself or get it done cheaply, but you increase the risk of it being done wrong and running afoul of the IRS.
Don’t Forget about Depreciation Recapture
Depreciation recapture often surprises investors at the point of sale. When selling, the IRS “recaptures” depreciation deductions previously claimed, taxing these at a higher rate (typically 15-25%) than standard long-term capital gains. This can significantly reduce the net proceeds upon sale, making bonus depreciation primarily a tax-deferral strategy rather than permanent tax avoidance.
Who Benefits from Bonus Depreciation?
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High-Income Investors: Investors facing significant tax burdens stand to benefit dramatically, potentially saving tens of thousands of dollars immediately.
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Real Estate Professionals (REPS): Those qualifying under IRS guidelines can use these deductions against active income, creating substantial tax savings.
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Investors Experiencing High Taxable Events: Individuals who have realized large taxable gains (e.g., sale of businesses, large income events) can offset these through strategic bonus depreciation.
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Long-term Investors: Tax benefits improve for longer-term holding periods
Who Might Not Benefit?
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Low-Income Investors: Those without significant tax liabilities may not fully utilize immediate deductions.
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Short-Term Property Owners: Investors planning to sell properties soon may face accelerated recapture taxes, negating immediate savings.
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Smaller Property Owners: The upfront cost and complexity of a segregation study may outweigh the benefits.
Pros of Bonus Depreciation
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Immediate Tax Savings: Accelerating deductions enhances cash flow immediately
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Strategic Flexibility: Ideal for offsetting significant taxable income events
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Enhanced Investment Returns: Increased immediate liquidity can be leveraged into additional investments or debt reduction
Cons of Bonus Depreciation
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Upfront Costs: If needed, cost segregation studies involve high costs
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Recapture Liability: Tax rates change over time. Investors planning for the long-term must consider potential future tax increases, possibly making recapture more costly
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Complexity and Audit Risk: Aggressive strategies may attract IRS scrutiny, necessitating meticulous record-keeping and professional guidance
Bottom Line
100% bonus depreciation is a powerful financial tool in real estate investment tax strategy, but it has limited or no benefit to many casual real estate investors. Each investor must weigh immediate benefits, recapture implications, long-term financial strategies, and up-front costs to determine if it’s the right tax strategy for them.
Before proceeding, consult with a tax professional to assess how this aligns with your investment goals and tax situation. You are welcome to contact my CPA, Matt Bormel at [email protected].
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].
Upcoming (pre-market) ERG Listings, Details and Additional Listings Available by Request
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Falls Church City – 4BR/4.5BA/3,000+ sqft – End-unit townhouse (1995) – Rees Pl Falls Church VA 22046
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