100% Bonus Depreciation in Real Estate: Trump’s Tax Bill Game-Changer for Investors

If you’re a real estate investor or business owner, you’re going to love this. Trump’s new tax bill has passed, and one of the biggest wins is that 100% bonus depreciation is back – and this time, it’s permanent. This is a game-changer for anybody looking to maximize tax savings and build wealth faster.

I recently sat down with my personal CPAs, Brandon Hall and Thomas Castelli from Hall CPA, for a live webinar with my Passive Investor Circle group. We broke down everything you need to know about this tax bill and how it can benefit your investment strategy.

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What Is 100% Bonus Depreciation?

100% bonus depreciation was originally introduced in 2017 and was in place through 2022. It allows business owners and real estate investors to fully depreciate certain assets within the first year of owning and operating that asset.

In real estate specifically, you have a few different types of depreciable property according to IRS guidelines:

• 5-year property: Tangible personal property (section 1245 in tax code)
• 15-year property: Land improvements (section 1250 property)
• 27.5 or 39-year property: The actual building itself (27.5 years for residential, 39 years for commercial)

With bonus depreciation, you can completely expense or depreciate that 5-year and 15-year property all within the first year that you acquire and place it in service (when it’s rent-ready).

IRS Definition: “Bonus depreciation allows businesses to deduct a large percentage of the cost of eligible assets in the year they are placed in service.” – IRS Publication 946

A Quick Example

Let’s say you buy a $500,000 property. Typically, about $100,000 might be allocated to the land value (which is not depreciable), leaving $400,000 for the building.

Of that $400,000, approximately 25% (or $100,000) would be eligible for 5-year, 7-year, and 15-year property classification through a cost segregation study. With 100% bonus depreciation, you can deduct that full $100,000 in the first year, on top of your normal depreciation expense from the 27.5-year property.

This creates a paper loss that reduces your taxable income, even though you may be generating positive cash flow from the property. You’re essentially telling the IRS, “I lost money,” while you might actually be making money.

How Bonus Depreciation Works for Different Investors

For Limited Partners (LPs)

If you’re a passive investor in syndications, the loss generated from bonus depreciation is typically classified as passive. This means:

• The loss can only offset other passive income
• This includes income from other real estate you own directly or from other syndications
• It can shelter rental income and gains from sales of other passive investments
• If you don’t have enough passive income to use the loss, it gets suspended and carried forward to future years

For Active Investors

If you qualify as a real estate professional or use the short-term rental loophole, you may be able to use these losses to offset your regular income, including W-2 or business income.

The Return of 100% Bonus Depreciation: Timeline and Implementation

The big news is that 100% bonus depreciation is now permanent under the new tax bill. Unlike before, there’s no phasing out – it’s here to stay (at least until they change the laws again).

Important Implementation Dates:

• January 19, 2025 and beyond: 100% bonus depreciation applies to properties both acquired AND placed into service after this date
• January 1-18, 2025: 40% bonus depreciation applies
• 2024 properties: 60% bonus depreciation applies

This timeline is crucial for planning your real estate acquisitions in the coming months. If you’re considering a purchase, the timing could significantly impact your tax benefits.

Depreciation Recapture: Understanding the Full Picture

While bonus depreciation creates fantastic tax benefits upfront, it’s important to understand depreciation recapture when you sell. This is often overlooked but is a critical part of your long-term investment strategy.

When you take depreciation, it reduces your cost basis in the property. Using our $500,000 property example:

• Original cost basis: $500,000
• Depreciation taken: $100,000
• Adjusted cost basis: $400,000

If you later sell this property for $600,000, you’d have:

• $100,000 in depreciation recapture (taxed at a maximum of 25% according to IRS Section 1250)
• $100,000 in capital gains from appreciation (typically taxed at 15-20% for long-term gains)

Even if you sell the property for less than you bought it (say $480,000), you could still have a taxable gain due to the reduced basis from depreciation.

When Bonus Depreciation Might Not Be Right for You

While the tax benefits are substantial, bonus depreciation isn’t always the optimal strategy for everyone:

1. If you plan to sell the property within 1-2 years, the recapture tax could outweigh the immediate benefits
2. If you’re already in a very low tax bracket, the value of the deductions may be limited
3. If you have no other passive income and don’t qualify as a real estate professional, the suspended losses may not provide immediate benefit

Always run the numbers for your specific situation before making a decision.

Bonus Depreciation by Property Type: Not All Real Estate Is Created Equal

The percentage of purchase price that can be allocated to 5, 7, and 15-year property varies significantly by asset class:

This means a $1 million mobile home park could potentially generate a $700,000 bonus depreciation deduction in the first year!

The reason for these differences? Mobile home parks and RV parks have concrete pads that are considered land improvements (15-year property), which make up a significant portion of the property’s value.

Other Key Points from the Tax Bill

While 100% bonus depreciation is the headline, the bill includes other important provisions:

• SALT cap increase: The state and local tax deduction cap has increased from $10,000 to $40,000 (though it phases out for incomes over $500,000)
• QBI deduction extension: The 20% Qualified Business Income deduction has been extended
• Section 179: Still available for commercial properties to expense certain components like HVAC systems
• Charitable deductions: Now capped at 35% of earnings for high-income earners (previously 100%)

Strategic Use of Suspended Passive Losses

If you’re accumulating suspended passive losses that you can’t use immediately, don’t worry. These losses can be valuable assets in your tax planning strategy:

1. They can offset future passive income from your investments
2. They can offset gains when you sell passive investments
3. They can be used strategically by investing in businesses that generate passive income to you
4. They will be used on your estate tax return if you pass away (your heirs receive the assets at fair market value)

Frequently Asked Questions

Q: Can I carry forward bonus depreciation to future years? A: Yes. If you don’t have enough passive income to use the deduction in the current year, the losses are suspended and carried forward indefinitely until you have passive income to offset.

Q: If I sell my rental property, can I invest the proceeds in a syndication using a 1031 exchange? A: Generally no. A 1031 exchange requires exchanging real property for real property. Syndication investments are partnership interests, not direct real estate ownership. However, Delaware Statutory Trusts (DSTs) can be an alternative that qualifies for 1031 exchanges.

Q: Does bonus depreciation only kick the tax can down the road for passive investors? A: While there is a recapture element when you sell, the time value of money makes this strategy beneficial for most investors. Additionally, there are strategies like 1031 exchanges, opportunity zone investments, and holding properties until death (for a step-up in basis) that can mitigate or eliminate recapture taxes.

Is This Right For You?

If you’re a high-income earner looking to reduce your tax burden and build wealth faster through real estate, the return of 100% bonus depreciation presents a significant opportunity. Whether you’re actively investing in properties or participating as a limited partner in syndications, understanding how to leverage these tax benefits can dramatically improve your overall returns.

Remember, while tax benefits are important, they should be just one factor in your investment decisions. Always consult with a qualified CPA who understands real estate investing before making major financial moves.

Next Steps for Smart Investors

1. Review your current portfolio to identify properties that might benefit from a cost segregation study
2. Plan your acquisition timeline to maximize bonus depreciation benefits
3. Consult with a real estate-focused CPA to model the specific impact on your tax situation
4. Consider diversifying into asset classes with higher bonus depreciation allocations

Want to learn more about how to maximize your real estate tax benefits or join our next educational webinar? Join my Passive Investors Circle today!

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or investment advice. Always consult with qualified professionals regarding your specific situation.