Bonus depreciation is a valuable tax incentive for real estate owners, allowing them to immediately deduct a significant portion of the cost of eligible properties. Instead of stretching these deductions over the asset’s useful life, this approach enables you to write off a substantial percentage of your investment right when you acquire the property.

Since the Tax Cuts and Jobs Act of 2017, bonus depreciation has been particularly attractive, offering a full 100% deduction on qualifying property. This means that if you invest in an eligible property, you can deduct the entire purchase price in the year you place it into service. For instance, if you buy a multifamily building or commercial space, the immediate tax relief can greatly enhance your cash flow, giving you more funds to reinvest or cover operational expenses.

The Phase-Out of Bonus Depreciation

However, it’s important to be aware that this incentive is gradually being phased out and is scheduled to sunset by the end of 2026. Here’s how it’s changing:

2024: 60% bonus depreciation
2025: 40% bonus depreciation
2026: 20% bonus depreciation

This difference can significantly impact your tax liability and investment strategy. As the phase-out progresses, real estate owners must plan accordingly to maximize these deductions.

Why This Matters for Your Investments

The ability to reduce taxable income through bonus depreciation can be a game-changer for your investment strategy. It provides immediate financial relief, enabling you to reinvest those savings into your property or other ventures. The enhanced cash flow can also help cover renovation costs, improve tenant amenities, or simply strengthen your overall financial position.

Moreover, as a real estate investor, understanding how bonus depreciation interacts with other tax strategies—like Section 1031 exchanges or capital gains reinvestments—can further enhance your tax planning. When executed correctly, you can create a synergistic effect that allows you to grow your portfolio while minimizing tax liabilities.

Bonus depreciation is more than just a tax deduction; it’s a strategic advantage for real estate investors looking to optimize their investments. With the phase-out approaching, now is the ideal time to evaluate your investment plans and consider how to leverage this benefit effectively.

The information provided in this article is intended for general informational purposes only and should not be construed as tax advice. While I am a real estate professional, I am not a tax advisor. I encourage all investors to consult with a qualified tax professional to discuss the suitability of bonus depreciation or any other tax strategies for their individual circumstances. If you need a referral to a trusted tax advisor, I would be happy to assist!

Source: INVESTOPEDIA & DARROWEVERETT