Real Estate Professional Status and Bonus Depreciation

[David Pike]

I am a real estate professional (claimed status in 2020) and my wife is a high income earner. I am buying a 3 unit and we are both on the loan and both on the title. The plan is to claim bonus depreciation to offset her W2 income but can I still do that if her name is on the title? Wouldn't that mean that half the income (in reality, it will be a loss due to bonus depreciation) is attributable to her? And since real estate is passive for her, that wouldn't offset her W2 income.

P.S. The lender won't allow me to close as an LLC or without her on the title.

[Lane Kawaoka]

It does not always make sense to spend 10K on a cost seg to get losses especially if you are doing smaller properties (under 100 units) and based on the time value of money, if we are looking for a early exit it does not make sense - should we be doing an exceptional job going through the unit upgrades. As you know when you sell an asset all the depreciation and bonus depreciation needs to be recaptured or given back.

Most investors are not Real Estate professionals and therefore cost segs and bonus depreciation is overkill beyond (normal bonus depreciation) as it will knock out the passive gains in the first few years of the project in most cases. In other words, even with normal depreciation you are offsetting most of your capital gains. If you are a REP and therefore interested in this subject, there is a high likelihood we will be doing a cost segregation but always reserve the rights as managers to make the call in the end in the best interests of all investors.

Assuming an LP is not a "real estate professional" what is the advantage to the cost segregation to that investor? I understand it's certainly not a bad thing, but what's the advantage?

In most cases normal depreciation will more than offset gains in the first few years of a value add project. The "excess" suspended losses will pile up on your books and can be used to offset passive gains. Passive gains could be coming from other passive investments especially coming from sale of other assets (which are overripe - you should have sold earlier so you don't have such a large capital gain and depreciation recapture in the first place).

In summary Passive Losses cannot offset Ordinary Income (401k withdrawals) unless you are implementing REP status

That said I normally with do a cost seg with @Yonah Weiss