Public Service Announcement: Bonus Depreciation is Going Away!
Did you know that one of the most incredible tax benefits of owning real estate is going away at the end of this year? That’s right, at the end of 2022 you can say goodbye to 100% bonus depreciation. Well, it’s not completely going away, but it will be phasing out over the coming years. Here’s how that looks:
2023 = 80%
2024 = 60%
2025 = 40%
2026 = 20%
2027 = 0%
So, for those who aren’t complete tax nerds, what exactly is Bonus Depreciation? Bonus Depreciation only came into existence in 2017 with the Tax Cuts and Jobs Act’s (TCJA), and truthfully, it’s been pretty awesome for the past 5 years.
Depreciation is just the IRS’s way of recognizing that things wear out over time and thus become less valuable. And this makes sense. Things like carpet, appliances, windows—they all eventually wear down, but they do so at different rates. The IRS reconciles this by saying some things take 27 years to wear out, others take 15, while some only take 7. What we do is we take the value of the item in question and then divide that number by the number of useful years the IRS says that item has, and then each year we take that number as a passive loss on our K1s.
Awesome, huh? We get to show a paper loss, but in reality, our building has probably appreciated AND kicked off cashflow. The beauty of the passive losses is they reduce our taxable liability on cashflows and distributions. (Note: This is a complicated process and requires something called a Cost Segregation Study to perform.)
Now, this is where Bonus Depreciation comes in. Over the past 5 years we’ve been allowed to take ALL of those passive losses that we’d expect to get over the coming 5, 7, 15 (or whatever) years and bring them all forward so we can realize them in year one.
Let’s say we’re expecting to get $100K of passive losses over the course of 5 years. We’d only get access to $20K in Y1, $20K in Y2, etc. With Bonus Depreciation, we’re able to take all $100K as a loss in year one, which is awesome because if you have a big tax liability from a sale or just a bunch of cashflow to offset, you have those losses immediately available to use. Well, it’s only the case that you can take 100% of that depreciation in Y1 until the rest of the year.
This means if you haven't already, NOW is a great time to get into some real estate assets where you can bank that depreciation for future purposes.
We’ve still got about $200K left in The Olympus Fund for anybody looking to get into an awesome deal AND capitalize on all that Bonus Depreciation before it goes away.
If you’re interested in learning more, schedule some time with Joe Grunnet the Owner of DRG,
click here: https://meetings.hubspot.com/joe204/click-here-to-set-up-a-quick-call