Bonus Depreciation to Offset Cap Gains

[Jenn Rees]

Can anyone with knowledge of bonus depreciation weigh in on a scenario I’m piecing together? I have a call scheduled Monday to discuss a cost seg but would love a little more insight before that meeting.

We will be closing sale on a few RV parks in October. The cap gains will be over 300k. I would like to purchase a 2-2.5 mil home with the proceeds that will eventually be our primary, but that we could buy initially as a second home/investment and rent out for the remainder of 2024. My understanding is bonus depreciation is not prorated therefore as long as we rent the home before Dec. 31 of this year it would fully qualify. Are we able to take bonus depreciation on the home sale to offset the cap gains?

If so, is there a limit to how long we must hold the home as an investment property before we can move in and convert it to a primary?

I’m pretty ignorant to how bonus depreciation works- is there a way to calculate how much of the 300k capital gains tax we could offset with a 2+ mil purchase?

TIA for sharing your wisdom!

[Greg Scott]

This is one of those situations where it is best to say, you would be foolish not to hire a CPA to give you correct advice with 100% view of your entire portfolio.  

I will say that the odds this scheme works in your favor is very limited.

[Bill B.]

And don’t forget. Depreciation recapture (including your bonus depreciation) doesn’t go away with the conversion to a primary home. AND. Because it was a rental first you will never get a 100% tax free primary sale, only a prorated one. So if this new home goes up in value you are creating a tax bill you wouldn’t have if it was a primary home first instead of a rental. 

[Nicholas Coulter]

@Jenn Rees I have a CPA rec that is a remote CPA that works really well with us! Happy to send the rec over. 

[Ashish Acharya]

Bonus depreciation could be a viable strategy to offset your $300K capital gains, but it typically applies to specific property components identified through a cost segregation study rather than the entire residential property itself. If you rent out the home before December 31, 2024, you may be able to claim bonus depreciation on eligible parts of the property. However, there’s no set rule on how long you must hold the home as an investment before converting it to your primary residence, but it’s generally advisable to rent it out for at least a year to avoid raising any IRS concerns. The exact amount of capital gains you can offset will depend on the cost segregation study results, so it’s crucial to discuss this with your tax advisor to ensure you’re maximizing your benefits while staying compliant.

[Malik Javed]

Quote from @Ashish Acharya:

Bonus depreciation could be a viable strategy to offset your $300K capital gains, but it typically applies to specific property components identified through a cost segregation study rather than the entire residential property itself. If you rent out the home before December 31, 2024, you may be able to claim bonus depreciation on eligible parts of the property. However, there’s no set rule on how long you must hold the home as an investment before converting it to your primary residence, but it’s generally advisable to rent it out for at least a year to avoid raising any IRS concerns. The exact amount of capital gains you can offset will depend on the cost segregation study results, so it’s crucial to discuss this with your tax advisor to ensure you’re maximizing your benefits while staying compliant.

Agreed with @Ashish Acharya point above.

One thing to add, bonus depreciation is available for used property placed in service after 9/27/17, however it is does not apply to the portion where the taxpayer previously had a depreciable interest. There are certain rules regarding changes in use from investment to personal residence and vice-versa.

Another thing to keep in mind: The 100% bonus depreciation expired at the end of 2022 and is now phasing out at 20% per year, with the benefit fully sunsets after the end of 2026 calendar year.

I recommend you contact a certified cost segregation specialist and/or CPA to discuss your short-term goal. Feel free to reach out for more insights!

[Account Closed]

Quote from @Bill B.:

And don’t forget. Depreciation recapture (including your bonus depreciation) doesn’t go away with the conversion to a primary home. AND. Because it was a rental first you will never get a 100% tax free primary sale, only a prorated one. So if this new home goes up in value you are creating a tax bill you wouldn’t have if it was a primary home first instead of a rental. 

 This is a great point, I would strongly consider just selling the rental and then buying a new primary + other rental real estate 

[Basit Siddiqi]

The good thing about purchasing an RV Park / Mobile home park is that potentially, a good portion of the purchase price will be eligible for bonus depreciation.

This assumption is assuming you don't own most of the mobile homes but moreso the park and lease out the land.

Best of luck.