I recently hosted a workshop with Mitchell Baldridge and covered bonus depreciation, cost segregation and other opportunities that make real estate the most tax-advantaged business in the world. In this snippet, we cover his business RE Cost Seg and how bonus depreciation can save you money in real estate. To learn more about Mitch, visit RECostSeg.com.
The tax benefits of real estate begin with depreciation, which you can build on with bonus depreciation. If I buy a building, the IRS deems that it has a long (39 years for commercial real estate) useful life. That means that over the course of 39 years, I can slowly deduct the loss of 1/39th of the property value per year from my income. The beautiful thing about real estate is that historically the building’s value increases over time as you depreciate it, and you have access to leverage (debt) against the property. There are only so many businesses where you can put 20% down on an investment and realize the full value of its appreciation.
Straight-line depreciation sounds great because you can offset your income and pay less in taxes for decades. But Congress has created bonus depreciation which can supercharge your tax savings even more. Your building that has a 39 year lifespan is really made up of a ton of components that each have their own useful life like windows, doors, roofing, and other features. For components with a lifespan under 15 years, you can deduct their full value in your first year of ownership. This is how real estate investors front load their tax savings and end up paying minimal income tax on a yearly basis when they’re still buying properties. And there’s no other business that lets you buy long-life, appreciating, cash-producing assets and get a major tax deduction the year that you buy them.
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