Cost Segregation Study on a 16 unit and 401K To Reduce Tax

[Corey Reyment]

We are in negotiations on a 16 unit. Purchase price will be somewhere around $600K. We primarily wholesale and should end up somewhere around $400K this year of income from our wholesaling business. We met with our accountant and its looking like we will have about $40k-60K tax bill next year. Our wholesaling business is an S Corp and they recommended paying ourselves our salary and putting 17,500 each (husband wife) in to a 401K to help reduce some tax. 

I have recently heard about cost segregation studies and bonus depreciation. Can anyone shed some light on how this would affect our tax situation if we were able to buy it this year and would you put money in to a 401K to reduce taxes or are there other avenues we should look at to reduce tax?

[Yonah Weiss]

First of all congrats on your success @Corey Reyment. Having a high tax bill means you're making good money, nonetheless it's best to continue searching for strategies to further reduce that.

Bonus Depreciation is a great way to reduce your tax liability. Let's take your example and see how that would affect your situation.

Purchase price $600,000, let's say you allocate 15% to land (that's pretty standard in many places)

That leaves you with $510,000 depreciable basis.

Normal depreciation would give you $18,545 each year over the next 27.5 years, but the first year would be considerably less because you're buying the property in Q4 and depreciation is allocated according to when in the year you bought it. So let's say you would get approx. $4,636 of depreciation to write off. Not very much.

With Bonus Depreciation, you allocate (through a proper engineering based study) a good percentage to 5-year and 15-year property and take all of that in year 1.

Let's say the engineer was able to identify 25% of the value to 5 and 15 year property. That's $127,000 of depreciation! But it sounds like that's a bit too much for you. It would put you in a loss, and now there are limitations to how much passive loss you can carry forward.

With regular accelerated depreciation you could probably, get between $20-30K of extra depreciation (on top of that $4,636 in year 1, and $18,545 in years 2-6).

In terms of putting more into 401K you should speak to an expert like @Bernard Reisz on how to maximize those allocations.