Use Cost Segregation/Bonus Depreciation Instead of 1031 for MHP

[Keith Meyer]

Has anyone recently taken advantage of 100% bonus depreciation through a cost seg study to avoid having to do a 1031 on a large commercial property ($1MM+)? If so can you please message me or post about your experience on the forum? I'm very interested in this tactic on an under-contract property but the devil is definitely in the details and want to remove as much risk as possible. Thanks!

[Kory Reynolds]

I have a client that does this to the extreme, but for him it is more of a product of his growth strategy than a tax deferral one. He puts together hotel projects, and when the right opportunities come he sells them. The new hotels use cost seg studies, first year write off with bonus and de minimis are easily 25-30% of the project. Granted, hotels are just about the perfect example of great results in a cost seg. When he sells he is posting gains of $1m-20m, and managing to have very little taxable income. Granted now he has ownership in a large number of hotels that are heavily depreciated with high FMV and are very profitable - one day a lot of tax will come due.

The kicker here is of course depreciation recapture once you sell the project. This whole plan works on deferring tax while you are in growth mode, but eventually you'll have recapture on a sale, or you'll end up with a property with a low depreciation expense meaning a fair amount of taxable income coming out of the property.