2021 Changes to Real Estate’s Biggest Tax Incentive

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The 2018 tax and jobs act allowed for a bonus depreciation and whole bunch of passive losses that you could extract from deals that do cost segregation. The bonus depreciation was, Hey, if you have five, seven, 15 year property, anything less than 20 years. You could choose to accelerate the depreciation.


Now let’s say you have a carpeting and you put a hundred thousand dollars of carpeting into an apartment building. Normally you’d get to write off $20,000 a year as a deduction because the whole carpet will last five years. So you’d take $20,000 in June. What accelerated depreciation allows you to do is just take it in one year.


You have this huge incentive because about 30% of most buildings. Our five, seven, 15 year property. So all of a sudden you can accelerate your depreciation at any particular time. You can just, you can choose five years after owning a building. Boom, I’m going to take it. And you have this acceleration where you can really accelerate what you’re able to do.


Sometimes it’s 50. Sometimes it’s a hundred percent. It depends on when you put the building into service, but you can do the acceleration. And all you’re doing. There’s nothing crazy about it. You’re just writing it off early. You’re still gonna write it off over time, but it’s almost like getting a loan from uncle Sam for no interest and saying, Hey, I know I’m going to get the tax benefit over the next 20 years.


How about you? Just give it to me now. So if you guys miss it, the rule of thumb is about a third of the building gets written off in the first year, but to simplify it even more, a lot of these deals, you’re trying to max out the leverage 70, 80% loan to value. So what I’ve seen is passive investors that put in a hundred grand, they’re getting anywhere from 60 cents to almost a dollar back in that first year bonus appreciation, 60 grand or 80 grand back, depending on the deal.


Unless you qualify as a real estate professional way, what you might see as the accelerated depreciation. I think in 2023. So in three years, two years really will start to go down to 80% and I’ll drop to 60% and then go down from there. I’m not certain, but I may, I haven’t looked at it in so long. If it goes away completely, I’d be shocked, but sometimes it goes down to 50%, which is still pretty good.


Not always do we accelerate the depreciation, especially not on the five-year property. Sometimes you just let it spread because unlike you, like you’re a real estate professional, you had massive amounts of deduction, but it doesn’t help you to get really dizzy zero because the lower tax rates are pretty low.


Like I’m okay. Paying 12%. I’m okay. Paying 22%. What I’m not okay. Is paying 39.6% on rents. I’m not okay. Paying 37%. I’m not okay. Paying 32%. Like it’s getting too high plus by state. So sometimes it’s just about making sure that you’re hitting that number. So I tend to look at 200,000 and say, if I can keep people around $200,000 a year, That tax.


It’s not going to be so extreme. You get up into the half, a million, 600,000 rings, every dollar. So much of it is being taken away from you for every dollar you make. Let’s say we had the Biden for every dollar you made after a million bucks. If somebody was taking 60% of it. And that’s really what it gets up to.


If somebody is taking that much away from you, you’re probably don’t have much incentive to make money and it’s hurting. Cause it’s not always cash that you’re receiving. Sometimes it’s profit, that’s blowing down via K one or your investment. You don’t have the cash. Now you have to liquidate assets to pay the tax bill.


And that’s what we want to make sure that you’re never in that situation.

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