Last Call: Less Taxes With Bonus Depreciation

What’s up folks? Lane here. I’m gonna be talking about bonus depreciation and it going away here in 2022, but don’t worry, it’s not going away until the next few years. It’s just stepping down every single year. So first off, what is bonus depreciation and why should you even care about this thing now?

All right, so for you, those of you guys who know, you know, with rental real estate, one of the main reasons why I like rental real estate is because you can depreciate the asset and create a phantom loss or paper loss, whatever you wanna call it. But you can create these passive losses or pals for short.

P A Ls kind of clever, right? But you can take these pals and these passive losses can offset your passive Inca passive income from what you may say. Well, passive income from rental properties. So like your cash flow that you’re getting from it. Or you know, things you’ve held for a while and you’ve sold it.

Um, in terms of real estate, you know, you can use the losses from other investments to knock it out and not pay any taxes. And this is how I’ve kind of lowered my tax bill quite substantially over the last several years. Um, and this is, I think, the biggest thing that I’ve learned. Why do you wanna do real estate and why do wealthy people do real estate?

You know, for a lot of folks out there, before they even start working with us, they’ve got a high ordinary income or active income, maybe from a day job, or maybe they’re a business owner. But you know, we have a lot of clients that, you know, are maybe dentists or doctors making 600, $7,000 a year.

But that’s all ordinary active income. The problem with that is you can’t use passive activity losses or pals to knock it out because pals are, again, only used to knock out. Passive losses can knock out passive income. So what do we do? Well over time, you know, people work with us. They, you know, they join our network.

They get the connections and the deal flow to, you know, go from high active income or income where they can’t really shield themselves. And where, you know, the IRS is just absolutely destroying you every single year, and we’re moving you away from that to passive income. Why? Because you can use these passive losses to shield you.

From the taxes. And a lot of people who invest a lot in real estate, um, maybe not even more than like a quarter of their portfolio could possibly wipe out their entire tax load, um, from doing it this way. And this is the reason why I don’t invest in crypto or stocks because when you sell that stuff, it.

Consider all ordinary income before I go any further. Of course, I’m not a CPA, a tax attorney, anything like that. But hey, you know, um, I’ve been doing this for quite a while myself, and these are just some things that I personally do and also some of my, uh, colleagues who are also professional passive investors do themselves.

So what is this bonus depreciation thing? Right? So I think so. You guys have maybe owned rental properties before? No. You can write off the property over 27 years as a paper loss or depreciation loss, um, which is great. Just 27 years is a really freaking long time. Um, and this is excluding the land portion.

We’re only talking about the, the, um, property improvement portion that you can depreciate because land is not depreciable cuz it just stays there. But the cool thing about commercial real estate, and when you start to do these things called cost segregations, and we’ll get into what the heck a cost segregation is, is you can do these cost segregations and you can aggressively write off the property a lot faster than that really long 27 year cycle.

A lot of times you can write it off the entire building. Third of it in the first year, which we’ve done on many of our past projects, to create a huge, huge amount of these passive losses that dump on ourselves and passive investors, K one s, and now they can take this huge, huge loss and maybe offset their passive income and some of the people doing rep status.

Which is a little bit more of an event strategy that we kind of help people implement along with their cpa they can use these passive losses to lower their income. We’ve got a great example of that. Come to the next slide and how people are lowering their adjusted gross income from a million dollars maybe to a half a million dollars a delta to 500.

And at 50 cents on every dollar tax savings, that’s a quarter million dollar tax savings right there. But getting back to like this bonus depreciation via a cost, eg, right? So what the heck is the cost? So a cost e.g. is pretty much you pay a geeky engineer like how I was at one time to go out and itemize the entire building.

And if this is all kind of go, get you. It really doesn’t. You pay a guy about five to $10,000 to do this. There’s different ranges, and of course you wanna find a good one and we can kind of help you guys out if you guys need any referrals to this. But the engineer needs to actually go out and visit the property and, you know, take some notes and do their report.

But basically what it is, is this large report where they itemized all the little components of the building from, you know, from roof to plumbing, electrical, concrete, you know, everything. Basically what they’re doing is itemizing all the little components into dollar amounts into different categories, and those categories are five v, seven, 10 year category assets.

Certain things depreciate a lot quicker. Certain things to depreciate have a little bit longer lives than they might be in the 10 year category or more. So again, not really needed from a passive investor’s point of view. Passive investor’s point of view is to understand this stuff on a high level to know who to go get the cost tag or which in syndication to invest in that they’re doing a cost segregation, getting the bonus depreciation, and then be able to communicate.

To your CPA and what the heck to do with all this? Because most of the CPAs we find, or at least from what I see a lot of you guys out there, my clients, 95% of you guys have to change your cpa. Because a lot of CPAs just frankly don’t understand it and it makes sense. That’s why the CPA has a day job. They haven’t figured this stuff out yet.

Right. But hey, you know, maybe not everybody should know this stuff because then who would do our tax returns for us? Right? But anyway. So this Costa gets done, it’s passed off, uh, probably in a nice little PDF or Excel format, whatever. It gets passed off to the cpa, um, that you have and that can be distributed out to, um, yourself or as when we do it, we do a big syndication.

We do this all for our investors. We get the Costa, we pay for it, and then that allows us to pass it to our cpa, who then distributes all the losses, the passive losses to all I. Via the individual K one. So it all comes out at the end of the year on this nice little clean one page, K one document.

And what this does is now each individual past investor, or you know, if you’re doing this on yourself, um, doing it on your own properties, Um, you guys can check out the referral, um, partners at simple passive cash flow.com/coste. By the way, there’s some older videos and education on there if you want to do this all on your own.

But you know, you can go over there and, um, you know, you can do this cost segregation and get all this extra depreciation. Now, coming down here, you know, investors. You know, some of these deals I see, you know, you put in a hundred thousand dollars, you may get a hundred, $120,000 of depreciation losses more than offsetting, you know, maybe you made five, $10,000 a year more than offsetting that, and you’ve got this surplus and.

For those of you investors out there, you really want to have this form called the 85 82 form. Every investor needs to have this. If not, you need to ask your CPA for it. And a little dirty trick is the CPA is never like they give you this stuff because then they know you’ll probably just leave them after that point.

But, You know, I always check my 85 82 form and see how much passive losses I’m floating because that allows me to play strategy and whether I deploy the passive losses and activate it, essentially, you know, keeping it from my storage and using it to lower my AGI that year. Or do I keep it because maybe I’m having a big, uh, capital gain the next year or three, four years from now.

Right? And this is where it gets com complicated and every situation is just a little bit different. And that’s why we tell you guys well. You know, join our organization, you know, a book of free intro call with myself. We can kind of walk through this. Um, I’m not gonna give you any tax illegal advice here, right?

But I’m gonna teach you how this kind of works so you can make the best decisions for yourself. Or at the very least, have an educated conversation with your CPA because, um, you guys need to educate yourself. If not just CPA’s, just gonna do it the easy way, right? You ask most CPAs, how do I save tax?

They’re just gonna give you a bunch of lame stuff like, um, you know, do a 401k, do some pretax, post tax, maybe Roth ira, lame stuff, folks. That stuff is like playing checkers where we play chess. So, moving on. So what’s this bonus appreciation thing, um, going on? So in the following year, um, you know, this is gonna be stepping down.

So from the tax cut and job act, uh, I believe that was maybe around when Trump came into office, he signed in this, uh, nice little, uh, carrot for real estate investors. There was gonna be 100% bonus depreciation, and this is gonna be phasing away starting next year, 2023. Um, where right now in 2022, you get a hundred percent of it.

Next year you get 80% and a year after you get 60%, and then the year after that 40% and the year after that is 20%. So it’s phasing away is. Slowly, right. Not to say that 80% isn’t just as good as a hundred percent, and what I’ll kind of cover is that it’s just, it’s not like you’re getting 20% less.

It’s just for the bonus part. Right, so it’s, you’re still getting the normal, regular depreciation, so it’s not like you’re getting 20% and I don’t know exactly how much, and cuz I haven’t seen it, I haven’t compared my K one s from this year to when? Next year. it’s only 80%. But when I look at cost segregation reports from my own viewpoint and look at the numbers, I really don’t feel like it’s that big of an impact that a lot of people are kind of making their way out to be.

I all kind of feel like it’s a little bit of a scare tactic saying You better invest now, right before it’s a hundred percent before it goes down. Um, if you’re a passive investor and. Number one, your adjusted gross income is not higher than $340,000. Don’t even worry about all this stuff. Right? And I, I think this is a big mistake I see a lot of passive investors making is that they hear about these opponents appreciating passive losses, and they’re great.

But they may not be able to use the damn thing. So again, book a call with us, get to know us. Um, we can dive into your strategy, we can talk specifics, but if you are, again, you’re not a high income earner, this stuff doesn’t really, really pertain to you. It’ll, it only may, uh, mean something later on. But if you’re one of those people like myself who, um, likes to hoard passive losses just for the heck of it, even though I don’t need it, it may not be the best thing.

And you should maybe focus on investing. Better investments, better returns than forwarding passive losses that you may or may not need.

Where does that three $40,000 number come from? Well, these are the tax brackets in 2022, and I think they’re gonna be in inflation and adjusted for next year. So the premise is gonna be the same too. There’s, a lot of my clients who fall right around this red line in terms of income, and that’s why I talk about it a lot.

But also when you look at this, like if you look at. The progressive tax system, you know, most people are paying 22, 20 4%, but there’s a big jump between the 24 to the 32% range and that’s where that, this dotted line where I draw this dotted line where, you know, for a starter strategy for, you know, just somebody listing, you know, just kind of the default.

It probably is a good idea. Uh, above, stay above this line or below the line, however you want to call it. Right? Or keep your adjusted gross income under $340,000. Married, followed jointly. I’ll say that again. Keep your AGI under $340,000 adjusted gross income. Um, if you’re single, uh, it’s a lot lower at $170,000 adjusted gross income.

Now, personally, I’ve kind of taken the strategy where I wanna drive my income down way, way. Um, I use this in conjunction with real estate professional status and also I don’t have very much ordinary income, and if all my income is passive, I can use as much passive losses that I have to offset my passive income.

So if I have a million dollars of passive income and I have a million dollars of losses, I can drive my income down to zero if I wanted to. Right. And that. We’ll save that for your guys’ individual calls, right? If you guys, um, choose to step forward with that and, you know, we, we work with the credit investors here, so, um, if you guys are not a credit investor, maybe check out some of the free content.

Send me an email with some specific questions and we’ll point you where this stuff is in the podcast, on the website. But for, you know, kind of a typical client making say $500,000, you know, What are they gonna do to drop themselves down to three 40? Well, they, that’s a delta of about $160,000 that they need to lower their agi.

So if they can turn, if they can create that passive income to get that and also create the passive losses, they can use the passive losses to drop them down. Um, But if they are somebody who just has, you know, and this is probably you listening right out there, you don’t have any passive income. You only have ordinary income, right?

Ordinary income sucks because you can’t use the passive losses to lower it unless you have real estate professional status. And this is again, where a lot of new investors like this idea of passive losses from real estate. But if you don’t have rep status, It doesn’t do you any good, and it doesn’t really help that you’re hoarding these things too much.

And also, if you’re under, you know, if you’re making less than $300,000 a year, you’re not paying that much taxes as it is. You’re in the 22 or even less tax bracket. It may make sense just to pay the debt taxes, right? Not until your AGI goes up higher. Does it really make sense? Pull these levers again, every situation is different and we give everybody a free introduction, one complimentary conference call with myself because, um, you know, time is important, but I like to help out people.

Um, as this was all new to myself and like when I was, when I graduated college, started working for the man as an engineer in my twenties, the most useless information I got was investing in a 401k. And that’s just crap in my opinion. Sorry if you, that’s all you. But you know, welcome to the simple passive cash flow where we do things Definitely a little bit differently.

But what is this sales tactic that, uh, folks like myself are telling everybody, bonus depreciation is going away. You know, well, it’s, it’s phasing down, right? And you know, like next year it’s gonna go down 80%. But, you know, if you were to think about the bonus depreciation portion is just a portion of all the losses that you get.

There’s. A lot of that, that stuff may not be taken in the first year. And, again, I just don’t think like, it’s, like it’s literally gonna step down 20%. So an example would be maybe you invested a hundred thousand dollars and you got a hundred thousand dollars of passive losses because, you know, the deal is using pretty good leverage and that’s how you’re getting that much capital and equity, um, to contribute to so much of that losses.

So in that, Um, what, what I, what I would say like in the next year when bonus appreciation goes down to 80%, it’s not like you’re gonna get 80%, if it was the same amount of capital contributed the same deal, but in the 2023 instead of 2022, at that point, um, I probably guesstimate that it might be maybe like 10% less than what you got.

Still pretty good, right? Um, you’re just gonna have to invest a little bit more. But you know, at some point this stuff is phasing. And the best time to do this was yesterday. Like, you know, we talked to a lot of our clients about infinite banking, right? And how there was last year there was this big, um, harrah over like the 77 0 4 changes or whatever it was.

But you know, this stuff is never getting better, just like investing, right? The best time to invest was yesterday. But, you know, another thing that these passive losses can do other than just manipulating your adjusted gross income from that year is also. Offsetting capital gains. So capital gains is, you know, when you sell an asset or syndication comes full cycle and you get your money back, and you get your nice returns exactly why you went into an investment for the first place.

Um, you’re gonna get this, uh, hit with these capital gains. And this is straight from my tax form. And back in 2017, I sold, uh, I believe this year I sold six or seven of my little rental properties for a capital gain of, uh, almost $200,000. They’re in line 13, $198,000, right? Oh, crap. Right? That’s a lot of, uh, taxes.

Um, if I’m, if I was in like the $300,000 range, Exploded my AGI up to $500,000. But what I did was I used my passive losses because I was investing in syndication deals prior to this, or maybe in the same year. Um, I was compiling all these passive losses via cost segregation, bonus depreciation, and I was, um, I.

I had a pretty good amount just, um, being suspended is what they call it, suspended passive losses or passive losses that haven’t been executed or used yet. And what I did is I just pulled it down from the cloud in a way, um, and I put it there on line 17 to offset it. Boom. Knocked it out, and then paid no tax.

And this is where a lot of like old school investors, they always talk about this 10 31 idea. Um, 10 31 is just another way to defer, but the problem there is you’re putting all your money from one deal to another and the deals are getting bigger and bigger, which totally violates one of my big things. I tell a lot of my investors, you never want to have more than five to 10% of your net worth into any one.

So old school investors, what they’re gonna do is they’re gonna buy a single family home, 10 31 into a duplex 10 and 31 into a fourplex Aex 16 unit. You know? Then they’ve got all this capital gain and the only way that they can get away from the taxes is die. And the problem with doing it that way is everybody knows when you’re a 10 31 buyer, you’re a sucker.

Right? We love it when people buy our apartments that are 1031 buyers because we know that they are motivated buyers. In fact, they’re so motivated that because if they don’t close the deal in 180 days or whatever, that they have to pay all this taxes to the IRS and to get absolutely killed. Right?

Maybe their four might look like this, but like add another zero here at the app. And this is where this whole new school way of thinking of get rid of that stupid 10 31 exchange and break up your portfolio into many, many deals. Like personally, I think I must be in like 80 or a hundred syndications at this point.

And all my net worth is di like very diversified geographically, different asset classes, different deals. Um, I do a lot of apartments personally and we operate that, but I also go into many, many other asset classes that are a little bit diversified on how it’s correlated with the economy, right? We never wanna know what’s gonna happen with the economy and we never know how it impacts anyone.

Asset class sector. So well, from a tax perspective, what this is doing for me is it’s allowing me, you know, these deals that I’m in, they may cash out and gimme a huge gain, which is good. The bad part is you’re gonna get the capital gains and depreciation recapture. But if I break this up so much, And I keep a certain level of passive activity losses on the 85 82 form.

Then at some point I’ve created this Nirvana world where, you know, if I’m in a hundred deals and 10 of ’em cash out, it gives me a whole bunch of money. You know, my passive loss, suspended passive losses, maybe a million or $2 million. But it may go down to 800, but then when I invest, reinvest the money, it’ll go way back up and it just keeps going up and up and up.

And this is kind of the concept of passive loss nirvana. And you really never pay taxes just like you were with a 10 31. But with a 10 31, everything is pegged on one asset, right? Again, not diversified. Um, Just a different concept, right? Like if you’ve been, think you’ve been kind of beat to death by the 10 31 guy or the salesman selling it, you know, you probably think it’s the best thing.

It’s one alternative. And to me, um, a lot of these, what I try and do, and I try things, make, make things very simple, especially for the people in our ecosystem, right? Like, there’s so many things out there financially, but for high net worth, high paid, professional, professional investors, passive, I. Things are very simple and when it comes to deferring taxes, you know, other than you know, the Section 1 21 where you only have $500,000 in your primary residence in opportunity zones, which is something very different to cover, maybe in another video, but.

The only other options you have is deferring it right? And a 10 31 is just one way you’re deferring your taxes, whereas doing it this kind of chopped up method into diversified many deals with bonus depreciation is so much more of a superior strategy. Um, 10 31 is just a tool, right? And it’s all tools.

You only use the tools in the ripe situation, in my opinion, my humble opinion, because apparently I’m not a financial planner, right? I can’t sell you garbage commission products like they can. Um, a ten one exchange is used in certain situations where you have a highly, highly appreciated asset. You know, so for example, like say a, a guy has a business that he started like a dentist franchise for 50 grand and you know, 30 years later it’s now worth 10 million and now you’re looking at a $10 million capital gain that you made 10 31 into something like kind.

But in that, in that situation, I may probably consider more of a monetized installment. So which is more superior to 10 to one exchange, but either. Like before you got to that point, you should have took the money out and invested in a syndication deal, started to compile your 85, 82 form padded with passive losses.

So when this fateful day comes, and it does always come, um, you have these passive losses to as a, as kind of like a pill to sell the asset and offset that. And then if you come short, maybe there’s some other advanced strategies like land conservation easement. Uh, oil and gas deals, uh, what’s in an op, the combo with opportunity zone and your rep status.

Um, you know that there’s a myriad of different ways, and at that point, if it’s that huge of a, uh, capital gain of over a million dollars, $2 million, then yeah, maybe you would need to do a myriad of different things. But if you’re. Average investor and you bought a rental property for a hundred grand and it went up by a few hundred thousand dollars capital gain.

Dude, that’s not that much capital gain. You should be able to invest, you know, several hundred thousand dollars or at least, you know, refinance and get that money out and invest it. And then you should get, you should be able to pick up, you know, a few hundred thousand dollars at least a passive loss is pretty dang easily.

If you don’t know how to do that, you need to get around other passive investors that are accredited and figure out how to do it, because this is, I mean, taxes are your number one expense in life. But anyway, that’s then on my spiel folks. If you guys like this video, Please leave a comment below or ask any questions.

If you guys have any specific questions, send it to the team at simplepassivecashflow.com. If you’d like to hear more and enter into our free e-course. To learn more about this stuff in a more curated form, um, you guys can join the club at simplepassivecashflow.com/club. Thanks.