Depreciation Tax and the Section 179 Deduction
Let’s look at Depreciation of assets, either via Bonus Depreciation or Section 179 Depreciation and what we consider as CPAs when doing your taxes. With the tax reform, these forms of depreciation have taken on a new light, so it’s worth taking note of these if you own real estate.
Cost segregation studies
We mostly speak about Cost Segregation studies for newly built properties or properties that have just been acquired. The goal of a cost segregation study is to identify and separate the assets that have been acquired in a transaction that may be able to depreciate over a much shorter time frame than the entire building. For example, if we acquire a property for $1 million, we may be able to identify $50k of carpeting that may be depreciated and deducted over five years versus 39 years. What this achieves is the ability to speed up deductions and further reduce your taxable income in the current year. It should be noted – sometimes owners should not want to speed up deductions if they have other properties that are also generating losses in the early years and not much taxable income. Generally, we want to be able to time deductions in years where we have the most taxable income when we are in higher tax brackets than in years when we are in lower tax brackets.
Bonus depreciation – a new depreciation tax rule
That being said, if we have significant positive Net Income, let’s look at how we can speed it up with the 2017 tax reform, and through 2022 we have a new 100% bonus depreciation on eligible assets on acquisitions, new construction, or renovation (whereas it used to be 50%). Note that the 100% bonus depreciation election gradually declines from 80% to 20% in the 2023 – 2026 tax years on eligible assets, such as tangible property, like carpeting, wallpaper, interior glass, built-in cabinets, a breakroom sink – these are eligible for bonus depreciation.
Land improvements depreciation
There’s also 15-year land improvements depreciation (this differs from building improvements) and this includes landscaping, signage, parking lots, sidewalks, and generally items that you see outside of the building. While it’s not eligible for bonus depreciation, it is eligible for Section 179 depreciation. A VERY important note: that Sect 179 property can only be depreciated up to the amount of positive Net Income. Thus, if you have a loss in the property, we don’t like taking Sect 179 depreciation because it is limited and you’re not going to get the immediate benefit of it. For example, if I have $20k of net income, but $50k of Section 179Land improvements depreciation property, I can’t create a loss with Section 179 deductions to offset other income, but you can with bonus depreciation.
Other notes on these forms of depreciation:
Total Section 179 eligible property is limited to $1,020,000 for active properties. Phase-out begins at $2.5 mm and is done at $3.5mm of eligible assets. There’s no limitation for bonus depreciation.
Depreciation tax considerations are just a small part of what we can do to save you money with strategic tax planning. Find out more:
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.