YOU BUY COMMERCIAL REAL ESTATE FOR INCOME TAX BENEFITS…

YOU BUY COMMERCIAL REAL ESTATE FOR INCOME TAX BENEFITS…

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PART V…

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We do a Cost Segregation Study to take advantage of the provisions of the Internal Revenue Code to accelerate the depreciation deduction and, also take advantage of the provisions dealing with Bonus Depreciation.? Instead of depreciating an asset, Tangible Personal Property, over the normal useful lives that we normally use as dictated by the Internal Revenue Service and Congress, we can depreciate all of the Tangible Personal Property in one year instead of stretching it out over all that time.

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The Internal Revenue Service says that, depending what items you are dealing with, the items will be depreciated over 5 years, 7.5 years, and 15 years.? The textbook definition of depreciation is the systematic allocation of cost of a fixed or non-monetary asset over the period of benefit.? Bonus Depreciation allows you to write off all of the Tangible Personal Property in one year and that can create a large Net Operating Loss that, if it not used up in the current year, can be carried forward to the next year and the next year until it is used up.

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But, after 5 years the asset with the 5 years useful life would have been depreciated to ZERO anyway, after 7.5 years the asset with the useful life of 7.5 years would have been depreciated to ZERO anyway, too.? And, after 15 years the asset with the useful life of 15 years would have been depreciated to ZERO too, too!!! (I did that purposely) So, after 15 years the land had not been depreciated, the assets with the different useful lives would have been depreciated to ZERO and depreciation on the structure remains for another 12.5 years.? So, in year 16, if you hold onto that asset for that long, you would be in the same position that you would have been after 15 years anyway.? So, you have not eliminated once cent of income tax.? You have deferred the income tax.

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But what that does do, is it puts the tax savings in your pocket NOW!!!? Instead of paying that money to the Department of the Treasury, I was a CPA for over 50 years, and I know who you write the check to, so you can use that money to purchase other real estate, to improve what you just bought, for operations, or just to earn income on.? The present value of money is a very important concept and that actually does save you money or taxes!!!

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Once last point.? Starting January 1, 2023, Bonus Depreciation began to be phased out by 20% a year so, by 2027, Bonus Depreciation is supposed to go away.? But it won’t because the government has to keep the incentive for the real estate investor to keep buying or building and we will only find out what Bonus Depreciation will become as we get closer to 2027.? If the government, Democrats or Republicans, stop giving real estate investors or professionals the incentive to keep building or buying commercial real estate the economy will become stagnant and we would probably go into a recession.?

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So, it is my educated judgment that the government will come up with something to replace Bonus Depreciation and I have no clue what it will be or what it could be called.? They could call it Mickey Mouse Depreciation but it’s really important that we have something to replace Bonus Depreciation.???