Bonus Depreciation — What is it and how does it work?

Everyone talks about the tax benefits of investing in real estate, but what are they? And how do you get them? One benefit you may have heard of is bonus depreciation.

Thanks to the Tax Cuts and Jobs Act, this tax incentive allows businesses to deduct 100% of the depreciation—which would have otherwise been on a 30-year schedule—of their assets, such as equipment and buildings, upfront.

This provision was created to help stimulate the economy by providing a means for companies or property owners to pay substantially lower taxes in the year in which they claim the depreciation.

However, the ability to deduct 100% of the depreciation is only temporary. In fact, 2022 is the last year to capture 100%. After the end of this year, the 100% allowance will decrease 20% per year until January 1, 2027.

The chart below outlines the schedule of changes to bonus depreciation rates each year until 2027.

Who qualifies for bonus depreciation? 

To take advantage of bonus depreciation, the asset must be owned by you or your business. But there is an exception— if you don’t own the asset but are involved in making capital improvements to it, you can still depreciate the value of the improvements. This exception to the rule makes you—our valued investors—eligible for bonus depreciation.

What assets qualify for bonus depreciation?

Assets, such as equipment and buildings, are eligible for bonus depreciation. Some examples of depreciable property include:

• Machines
• Vehicles
• Office buildings
• Buildings you rent out for income (both residential and commercial)
• Computers and other technology

Depreciable property can also include intangible assets—patents, copyrights, computer software and more.

What can’t you depreciate?

According to the IRS, assets that don’t lose their value over time or that you’re not currently making use of to produce income cannot be depreciated. Non-depreciable assets include:

• Land
• Collectibles like art, coins or memorabilia
• Investments like stocks and bonds
• Buildings that you aren’t actively renting for income
• Personal property, which includes clothing, your personal residence and car
• Any property placed in service and used for less than one year

Spartan Tip: Depending on the asset type that you own or invest in, the percentage of depreciation against your capital investment can vary. Work with a CPA or cost segregation firm to figure out what your potential tax savings can be. There are several great reputable cost segregation firms out there that can walk you through the process, help you know what to expect and take the guesswork out of it.

How can passive investors take advantage of these potential tax savings?

If you’re investing with a reputable syndication company, the operators or general partners should pass a portion of these tax savings down to you based on your equity or share ownership.

Keep in mind that everyone’s tax situation is different. It will vary person by person whether you can actually take advantage of the tax benefits or not—and of course how.

Ready to get started? Schedule a call with me to learn how you can take advantage.

Published by Lauren Brychell