When can you take bonus depreciation?

Question

Hi, we converted our previous primary into LT rental in January 2022. It’s been rented since. Purchased in 2018 at $325k, it is now valued at roughly $410k. Is it too late to get a cost seg and take bonus depreciation for our 2023 taxes? If not, what would be the value applied (purchase vs market) and bonus depreciation rate used (80% vs 100%)?

Michael Plaks · Answer

You misread the OP, Sean. The property was bought in 2018 as a residence but converted to rental in 2022. There is only one year of depreciation to correct. No 3115 needed.

And I agree - can and should are two different things. For example, you can read fast but should read slower.  ;)

Basit Siddiqi · Answer

Bonus depreciation is based on the year that the property is placed into service.
Since it was placed into service in 2022, it would be applicable for the year 2022.

Furthermore, also factor in improvements made to the property from 2018 to the time it was turned into a rental.

Julio Gonzalez · Answer

@Karen Tan Whether or not you could benefit from a cost segregation study depends on a multitude of factors. Since the property was placed into service in 2022, the bonus depreciation rate would be 100%. Most engineering cost segregation firms will offer a free cost benefit analysis to help you determine if the benefits would offset the costs. Feel free to reach out if you have any questions!

Nate Meeker · Answer

@Karen Tan - just helped a client in a similar situation.

- Not too late, you have up until the filing deadline, but in your case we must amend 2022.

- The value is purchase plus improvements.

Sean O'Keefe · Answer

@Karen Tan since you placed the property in service in 2018 it is likely TOO late to do a cost segregation study on this property. Bonus depreciation is 80% for 2023 (100% for 2022), but there is Tax Legislation currently being considered that could change bonus depreciation to 100% for 2023 (stay tuned for updates on this)...

*This post does not create a CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Sean O'Keefe · Answer

@Michael PlaksOh no 😳

Good catch - I did. @Karen Tan disregard what I said. This is for a property placed in service 5 years ago (in 2018)

Michael Plaks · Answer

@Karen Tan

It is not too late. You can do it now and apply to your 2022 tax return by filing an amended tax return for 2022. "Change of accounting method" will NOT be needed.

As was mentioned already, before doing it, you need to have an experienced tax accountant figure out if there is any potential benefit for you. Maybe, and maybe not, it's case by case.

Read this: https://www.biggerpockets.com/forums/51/topics/1075919-five-...

Christian Block · Answer

First, will a cost segregation benefit you?  Unless you or your spouse qualify as a real estate professional it's not very likely, unless you have other passive income you are trying to offset.

Since you placed this in service in 2022, you would need to file a change in accounting method to factor in the cost seg for 2023.  This is complicated and pricey, so you want to make sure there is a benefit.  If the cost seg only creates a larger passive loss that you carry forward, I would argue it does not.  BTW, you would use your basis of $325k as the starting point of a cost seg, not the $410k.

Christian Block · Answer

Sorry to derail this thread, but I think this is relevant info.

Maybe I'm hung up on "improper."  Is an improper method a method impermissible to the IRS?  Or is an improper method simply a permissible method to the IRS but one the taxpayer wants to change to achieve a greater tax benefit?

I think you can argue if the taxpayer filed a return with a permissible method (via with no cost segregation) point 2 does not apply and thus you go back to point 1.

BTW, I'm not arguing I am correct and will be happy to admit if I am wrong.

Michael Plaks · Answer

@Christian Block

As your quote states in (3), you need two consecutive returns filed in order to establish an accounting method.

And, per (2), a single year is corrected by amending.

When can you take bonus depreciation?

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