A Tax Change Real Estate Investors Are Going to Love


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Effective 9/27/17, (YES! 2017) 100% bonus depreciation is back.

Besides increasing the deduction to 100%, there is one more big change. Bonus depreciation now applies to used property that is purchased. In the past, the item had to be new in order to get the deduction.

And it’s applicable for residential and non-residential real estate rentals as well. Section 179 immediate expensing can be used for non-residential, but not for residential.

The bonus depreciation is available for any depreciable expense that would have 20 years or less in depreciable life and this is on a property after it is in service. You can’t do a cost segregation study to pull out personal property and then take the 100% deduction. You can’t take the 100% bonus depreciation on a property that is not yet in service.

And there is one more thing to consider. The new pass-through tax reduction may depend on depreciable property. If your taxable income is under $315,000 (married, filing jointly) or $157,500 (single), then it doesn’t matter. If it’s over that amount, then your tax reduction is going to be limited by either 50% of W-2 income or 25% of W-2 income and 2.5% of depreciable assets.

The definition of depreciable assets says that this includes property that is still in its depreciable life. If you use 100% bonus depreciation, your base will shrink. That could mean you have less possible pass-through reduction.

And on the other hand, (which probably makes 3 hands), most of the time you’re not going to have taxable income from real estate. Depreciation often significantly reduces the income. If it sells, you will have capital gains income which is not reduced by the pass-through income tax reduction.

You may have a real estate business, such as a motel or real estate flipping business, in which case the pass through income tax reduction could be very important.

All of this means that you need to carefully weigh whether it makes sense to take advantage of the depreciation now or not.

Luckily, it’s something you don’t need to decide until you file your tax return.


2 Comments

  1. Diane Kennedy says:

    Both Residential and Non-Residential properties can take advantage of the new 100% bonus depreciation. (That’s fantastic news for real estate investors!)

    Only the Section 179 expensing is limited to Non-Residential.

    Since bonus depreciation is now available on used items as well, I really can’t think of a reason why someone would use the Sec 179 instead of bonus depreciation.

  2. stephen carr says:

    Would any element of “Residential” use throw out the ability to take the bonus depreciation? Example, a mixed use project with retail on the first floor, office space on the 2nd and residential on the top floor. If the answer is yes, any residential disqualifies it, could I use separate entities to own the different floors?

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