Cost Segregation + Bonus Depreciation

[Account Closed]

Hello everyone. I’ve been following Michael Blanks content heavily over the past 2 months and what really stood out to me is the cost segregation & bonus depreciation. If someone could please explain these terms and give me a scenario on how that is beneficial for investor. My understanding is that essentially investors can write passive income they receive from funds/syndications off as a loss so that they don’t have to pay any taxes on it. Please correct me if I’m wrong

[Yonah Weiss]

Originally posted by @Natalie Kolodij:

Here's an actual example of Cost Seg + Bonus: 

You buy a small apartment complex for $500,000

Normally you get to depreciate the building value of that over 39 years (not land)

So lets say your building is worth $400k we depreciate that equally over 39 years. 

A cost segregation is something done by a qualifying firm/ expert where they separate out components of the building that may have shorter lives 

Say they do their thing, separate a value for electrical, HVAC ect- and they say $250k of this is all components with 7 years lifes. 

You can either, expense those portions over 7 years. 

Or potentially apply bonus. 

Bonus depreciation says assets with a life of LESS than 20 years, can be expensed 100% in year 1. 

So that $250k you get to deduct in year 1. And then your remaining $150k is spread over the 39 years. 

Things to consider: 

If you're going to hold it long term, your taxable income later will be higher because you deducted most of your value up front. 

If you're not a real estate professional, and your AGI is over $150k.....you are not allowed to use rental losses in the year they are incurred. So if you can't use the losses and you just generated a $200k loss, there's no real benefit that year. However, if you are selling another rental and generating say a $200k gain, you'll be able to offset that. 

Also, with 1031 exchange there is a little concern with if there will be any issues. Since now we've separate out a portion from being a "qualified real estate" asset. The IRS definition of real estate for 1031 and the state law differ. I think they're still going to allow it with 1031, but we haven't seen any direct guidance or tax cases on this yet. 

Great example Natalie. Not to be nit picky but just a couple minor clarifications: 1) Apartment buildings depreciate over 27.5 years, not 39 like other commercial properties. 2) the personal property segregated out, depreciate on a 5 year schedule not 7.