All Forum Posts by: Julio Gonzalez

Welcome to BiggerPockets, Staci! 

Welcome, Ryan! Sounds like you’ve done your homework. I'm excited to see you take action and get that first deal soon!

-Julio

Bonus depreciation and 1031 exchanges are two ways investors can lower their tax burdens. But knowing when to use each tool can make a huge difference to your bottom line.

Here’s how they can work for you.

Bonus Depreciation

Bonus depreciation is, essentially, an accelerated way to write off the cost of big purchases. With traditional depreciation, the cost of an asset is spread out over several years. With bonus depreciation, a large chunk of the cost is deducted the year you purchase it.

Generally, anything with a lifespan of 20 years or less can be included, such as:

• Computers and software
• Manufacturing equipment
• Some building improvements (think roofs, HVAC and security systems)
• Office furniture

Bonus depreciation gives you immediate tax savings by lowering your taxable income, freeing up cash flow.

Currently, the bonus depreciation deduction percentage is slated to phase out as follows:

• 2024: 60%
• 2025: 40%
• 2026: 20%

Remember – tax laws are complex, and proposed bills may not pass in their current form. For this reason, it is crucial to consult with a tax professional to make an informed decision.

Bonus depreciation may be a fitting choice if:

• You’re making major equipment purchases
• You have large capital gains from non-real-estate investments (bonus depreciation can help maximize your deductions)
• You anticipate higher taxable income in the current year

1031 Exchanges

The sale of an investment property can lead to hefty capital gains taxes. But a 1031 exchange allows you to delay those taxes by reinvesting proceeds from the sale into another “like-kind” property.

Here’s what you need to know:

• The deferment isn’t permanent
• You have 45 days after the sale to formally identify potential replacement properties
• You must close on the new property within 180 days of the initial sale
• The relinquished property and the replacement property must be held for investment or use in your business
• The replacement property must be of equal or greater value than the one sold

A 1031 exchange may be the right choice if:

• You plan to upgrade to multiple or large properties (instead of losing a chunk of your profit to taxes, you reinvest the full amount from the sale to boost buying power.)
• You want to diversify assets (1031 rules give flexibility within real estate – e.g. exchange an apartment building for a commercial space, raw land for a development site, etc.)

Having a better understanding of bonus depreciation and 1031 exchanges can help you make a more informed decision when it comes to your investments.

What are your experiences with these two tools?

Great point! Ground improvements are often overlooked. This is where a detailed cost segregation study becomes especially valuable, as it can accurately break out these land improvements from the non-depreciable land.

@Jon Henzel Determining whether to do a cost segregation study or not has a lot variables. How long are you planning to hold this property? If less than two years, cost seg probably isn't a good route. Obtaining a detailed cost/benefit analysis quote may help paint a clearer picture of whether it will be worth it.

As others have mentioned, you can do as many cost seg studies as you want in a year. However, there are a lot of factors to consider when get a cost seg study to determine if the benefits outweigh the costs. If you are able to get REPS status, that would help tremendously. Have you obtained any detailed cost/benefit analysis quote? Most cost segregation study companies provide the quote for free. Is it a reputable company and will the documentation provided from the study hold up in an audit? If you need any help or have any questions, feel free to reach out!

Quote from @Gregory Wilson:

I was looking for a serious answer. Not a "well people can do whatever they want, can't they?"

Of course they can. But it our responsibilities as trusted professionals to guide them away from harm and loss.

In the last few years I have had people call me to find a qualified intermediary for all sorts of frivolous reasons including because they don't want to pay the tax on $1100 of long term capital gain. Another at $5800 of LTG.

Do you think it is ethical to not tell them it is not ok? Or, do you take their money on the "hey, its their decision" theory espoused above?

How about a serious answer.

In cases where the tax savings are minimal, such as the examples you mentioned, it’s absolutely our responsibility to explain why a 1031 exchange may not be worthwhile and to help them weigh the true costs against the potential benefit.

Quote from @David Matthews:

@Julio Gonzalez thank Julio, and thanks for your message. I reached out to a cost seg company, it was about 3500$ and I didn't pull the trigger. My real question is... do I NEED a cost segregation study in order to depreciate? Or can I just use my structure value that was on the property appraisal? Both recently appraised in 2025.

A cost segregation study can help accelerate depreciation. It's typically most beneficial if you're looking to maximize tax savings sooner rather than later. However, you don't need a cost seg study to depreciate in general.

I am sure your event will be great, @Ashish Acharya! Thanks for sharing this information with us.

Yes—many investors dramatically reduce their tax liability using strategies like cost segregation paired with bonus depreciation. By accelerating depreciation on certain components of a property, they can create large paper losses that offset rental income. Here's a helpful article on cost segregation to give you some more insights https://www.biggerpockets.com/forums/311/topics/948757-cost-...