Bonus depreciation may sound good -- "oh, I can offset it against my W2 income and not have to pay tax", but in reality, it is just another way for the tax professionals to get more business by charging you for doing the cost seg as well as preparing an ever-increasingly complicated tax return. If you are a corporation or a real estate developer, it may be different, but for the vast majority of the mom and pop investors, it has no value.
First of all, I always find it laughable that any high income professional, doctor or lawyer or corporate executive, would want to trade their most valuable resource (time) for something they already have plenty (money). Second of all, any depreciation, regular or bonus, is a delayed tax. You still have to pay it eventually, possibly at a higher rate. If you are close to retirement age, and think your W2 income will decrease significantly in a couple of years, then cost seg and bonus depreciation can be useful. But I don't think that's the case for most people.
I am just a housewife, but my husband is an engineer and has an MBA. We have a STR beach house and he looked into the bonus depreciation scheme. He even went so far as creating an Excel file (as an engineer would do), and concluded that (1) if you are not already a real estate investor, you are actually better off by taking the money and investing in the stock market; (2) if you already own a STR, cost seg has a small benefit, but the benefit decreases the longer you own the property, also there is the cost of the cost seg itself. To be clear, he is not saying that you should not invest in real estate or STR. He is saying that if you want to invest in STR, do it because you think it's a good way to make money or because you want to diversify your assets, but don't do it just for the cost seg tax savings.
The key point to remember is that yes you can get the bonus depreciation right away, and depending on your W2 income amount, you can skip paying tax for the first 3 or 4 years. But then what? Once the bonus depreciation is over, your tax goes back up. Another key point: how much is your time worth? If you make $200k a year, that's $100/hr your employer is paying you. To use this "tax loophole", you need to spend at least 100 hrs AND more than anybody else. 100 hrs is 8 hrs a month -- if you have 3 or 4 rentals per month, your cleaner will spend more than that. I think realistically, 150 hrs or even 200 hrs is more likely, especially for a new STR owner.
Here is the Excel table my husband did, with some very simplistic assumptions. Assuming you have $1.2M cash, which can be invested in the stock market and reasonably get a 7% return. Or you can buy a $1.2M STR with the building valued at $1M, which is your max bonus depreciation amount. Assuming your W2 income is $250k, and you get a gross income of $100k from your STR. Roughly it translates to about $50k Net after deducting all expenses.
Conclusion: you save some money in the first 3 years, but at a cost of spending a lot of time to manage the STR, not to mention any start-up time to buy and furnish and launch the STR. But over a span of 10 years, you actually make less money.
Again, I want to emphasize, I am not saying it's a bad idea to invest in an STR. I am saying it's a bad idea to invest in an STR purely for the benefit of cost seg to lower your tax bill.
| |
Option 1: invest money |
Option 2: STR with Cost Seg |
| |
Investment income on $1.2 M |
W2 income |
25% tax on Income |
Money in the bank |
Value of my time |
Net Income on $1.2M STR |
$1M Bonus Depreciation |
W2 income |
25% tax on income |
Money in the bank |
Value of my time ($100*200 hrs) |
REAL NET PROFIT |
| Year 1 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
-$300,000 |
$250,000 |
$0 |
$300,000 |
($20,000) |
$280,000 |
| Year 2 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
-$300,000 |
$250,000 |
$0 |
$300,000 |
($20,000) |
$280,000 |
| Year 3 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
-$300,000 |
$250,000 |
$0 |
$300,000 |
($20,000) |
$280,000 |
| Year 4 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
-$100,000 |
$250,000 |
$50,000 |
$250,000 |
($20,000) |
$230,000 |
| Year 5 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
$0 |
$250,000 |
$75,000 |
$225,000 |
|
$225,000 |
| Year 6 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
$0 |
$250,000 |
$75,000 |
$225,000 |
|
$225,000 |
| Year 7 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
$0 |
$250,000 |
$75,000 |
$225,000 |
|
$225,000 |
| Year 8 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
$0 |
$250,000 |
$75,000 |
$225,000 |
|
$225,000 |
| Year 9 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
$0 |
$250,000 |
$75,000 |
$225,000 |
|
$225,000 |
| Year 10 |
$90,000 |
$250,000 |
$85,000 |
$255,000 |
0 |
$50,000 |
$0 |
$250,000 |
$75,000 |
$225,000 |
|
$225,000 |
| TOTAL |
|
|
|
$2,550,000 |
|
|
|
|
|
|
|
$2,420,000 |
