The 2017 Tax Cuts and Jobs Act (TCJA) has significantly impacted real estate investors in exciting ways. One of the areas that stood out to professionals was bonus depreciation on qualifying assets (i.e. furniture, fixtures, equipment, and machinery) purchases made after September 17, 2017.  

Bonus depreciation provided that assets that typically would be subjected to a depreciation schedule over a number of years (3, 5, 7, etc) could be depreciated entirely in the year purchased and/or placed in service. However, starting in 2023 the IRS initiated a phase out of this expedited depreciation allowance, per the TCJA details (that these provisions would fully phase out by tax year 2027).

What that means is that in 2023, taxpayers could take bonus depreciation for 80% of the total asset cost rather than the full amount. In 2024, that moves down to 60%, then 40% in 2025, 20% in 2026, before reaching 0% in 2027. Therefore, in 2027, these assets would return to their originally staged depreciation schedules from before the TCJA was enacted, which would mean losing this tax benefit.   

Most well-informed real estate investors are pursuing cost segregation studies which allow them to separate building vs section 179 related assets (those subject to bonus depreciation). While cost segregation was valuable before, the first year benefit obviously is not as beneficial as it was before the phase out began.  

However, it is still important to consider the cost and benefit of pursuing these cost segregation practices for property acquisitions (even in years after purchase, via Section 481(a) adjustments). If a study is anticipated to result in a substantial portion of the overall property acquisition to be furniture and fixtures, for example, those assets could potentially be depreciated over a far shorter period of time than the building itself (27.5 years for residential investment property and 39 years for commercial property) which provides a larger deduction for those earlier years than otherwise taken without the cost segregation.

While the phase-out of the bonus depreciation allowance may cause discomfort for those who previously benefited from it before 2023, there are alternative tax mitigation strategies that many real estate investors overlook. For those willing to seek advice, resources, and expert guidance, various strategies exist beyond this provision. By delving into the intricate details, investors can navigate the complexities that may significantly impact their tax optimization goals.

While many of the TCJA’s provisions are set to expire a decade after its introduction and passage, the tax benefits it offers have piqued the interest of real estate professionals and investors, prompting them to seek lasting efficiencies. Real estate has long been known for its tax advantages, but the 2017 legislation elevated these benefits to new heights. The goal now is to find alternative ways to maintain these advantages, albeit in forms not necessarily as widely known within the industry.

‍Securities offered through DAI Securities, LLC, member FINRA/SIPC. Advisory services offered through Savvy Advisors, Inc an SEC registered investment adviser. DAI Securities, LLC and Savvy Advisors, Inc are separate, and unaffiliated, entities.