It’s not what you make, it’s what you keep!

[Melanie Baldridge]

Here's a framework that you should know for tax planning:

The further you can push your taxes out, the smaller they become.

The time value of money shows us that a dollar is worth more today than 20 years from now.

Planning is used to kick the can down the road, and make sure there will be available cash to pay the tax!

The #1 way real estate investors defer taxes to later dates is with a system called depreciation and bonus depreciation.

Depreciation is the act of slowly, over time, deducting the initial expense of an asset against your taxable income.

Generally over a 27.5 (residential) or 39 (commercial) yr time frame.

So each year you can write off a few percent of the purchase price against your income. & different parts of the asset can be depreciated on different schedules.

To find out the useful lifespan of each component, you do a cost segregation study to analyze all of the parts.

The raw land can't be depreciated so you start by giving that a value first.

But other items can be depreciated on a quicker timeline.

A roof, road, sidewalk, fencing, walls, gates, doors, latches, flooring, air conditioners, pavers, curbing, landscaping, etc.

The IRS has a depreciation schedule for each type.

Some parts are 5 yrs. Others 15 yrs, etc.

So we depreciate a portion of the asset costs faster.

We do the study and get dollar amounts assigned to different parts and different schedules to front-load depreciation.

Now you can get 5 or 6% of the value as a deduction in the early years...

But wait... there's more.

Bonus depreciation allows you to deduct a certain percentage of cost in the first year an asset is put into service.

Anything that is on a schedule of 15 years or less...

So the doors, sidewalks, HVAC, walls, latches, curbs, security, gates, etc

A % of this stuff goes in Yr 1.

For years 2015 through 2017, first-year bonus depreciation for these items was set at 50%.

It was scheduled to go down to 40% in 2018 and 30% in 2019, 0% in 2020.

But then the Tax Cuts and Jobs act moved this percentage to 100% from 2017 to 2022 and 80% in 2023 and 60% in 2024.

Its not uncommon to allocate 30% of an asset cost to items that can be depreciated on a 15 year or faster time frame.

So now 60% of that 30% of your asset's cost can be depreciated in the first year, excluding land.

Pretty great.

This is how real estate owners, investors, and operators make millions and pay very little in taxes compared to W2 employees.

They pay even less and can offset other types of income if they are an RE Pro.