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Entity Creation, Bonus/179 Depreciation, and Offsetting Same Year Income
We need some general input on getting started from the ground up with a decent amount of money to initially invest from the current tax year. We operate a professional two-owner LLP unrelated to real estate (other owner is spouse). In a few months, we will be receiving a significant amount of income as a lump sum that would pass through as schedule K income after the LLP's deductions for the 2024 tax year. If we don't invest it and take advantage of bonus depreciation or 179 deduction/depreciation, then we'd be paying significantly more in tax after the income passes through as schedule K income and we would not be getting the maximum amount of benefit that we could with a sum of money like this.
We have been starting to get up to speed on the tax laws pertaining to commercial real estate and don't want to rush into any investment, but at the same time we know that bonus depreciation is only at 60% this year and is being phased out. From our research, it also seems that we could use bonus depreciation and/or 179 deductions to depreciate a lot of a property, improvements, etc., in 2024 to create a net loss to offset the income of our LLP, so long as we are active in a separate real estate investment business that we start for the purposes of acquiring property this year and operating the property/properties moving forward. But we don't want to be mistaken on our understanding or create the incorrect entity to get the benefits that we want. Unfortunately, so much of the literature and advice that is out there involves passive investments and/or situations where there are multiple investing parties in limited partnerships, etc. There's also a question for us about whether we'd derive more tax benefit from investing in a mixed use owner/user property which was partly occupied by our LLP business, or whether it would be more beneficial to simply acquire an investment property that we did not use for our LLP business at all, since it seems that we could generate more income that way and could use that income to help pay for office space elsewhere.
So we really would appreciate some input on some of these concepts rather than being sold an investment into someone else's project. To that end, any information or advice on the following would be helpful:
1. Are we correct that if we were to create a business entity such as an LLC for real estate investment, and we were actively involved in the management of our investments, then we could offset our LLP's current year's income by using any net loss from our investment property that we acquire this same year?
2. Is there any tax strategy that can be used to depreciate the actual cost of the building itself if not used by us for our LLP's business? It seems that 179 deductions/depreciations are only for buildings that are used in one's business.
3. With bonus depreciation, can we take advantage of any recent property improvements that were done before we took ownership of the property, or is bonus depreciation limited to depreciating the improvements that we make ourselves as the new owners?
4. Can bonus depreciation be aggregated such that it makes sense to buy multiple lower priced properties with lower NOIs, rather than one most costly property with a higher NOI, and then improve all of them significantly thereby creating significant net losses on each property that we can aggregate together to get the maximum bonus depreciation on each property and larger deductible net losses to offset our LLP income?
Any answers to these questions and any suggestions about how you would set up your business in this scenario to maximize the offset to your regular individual income from another source would be appreciated. Please keep in mind that we do not want recommendations for strategies involving financing, as we want to get some core holdings that produce immediate cash flow and not have that NOI reduced by loans at current rates in light of the current cap rates.
Also, just FYI, we are in California and no way to get around that residency in time to reduce state taxes.
Good morning John,
Investing in Real Estate can seem overwhelming in the beginning and there is so much information out there. I always advise clients to speak to someone who has experience and can give some honest advice based on actual deals and mistakes they may have made. May I suggest you reach out to @Jorge Vazquez , he would be more than happy to speak to you and answer any questions you may have. He has many years of experience and he is a wealth of knowledge. Good luck and hope you connect.