Last Chance to Lock in Tax Savings at a Higher Rate!

The “Tax Cut and Jobs Act” that was passed last week introduces a number of provisions that are beneficial for real estate investors.

There is one specific provision that real estate investors may not fully appreciate but should be of particular interest to them as it could provide very significant savings.

This provision allows for 100% bonus depreciation on equipment purchased after September 27th, 2017. Furthermore, unlike the prior bonus depreciation rules, the new rules allow for bonus depreciation to be taken on used property.

This means that any equipment purchased after September 27th, 2017, can be written off in its entirety in 2017. This is very significant as tax rates are to set to decrease in 2018. Thus, taxpayers will be able to maximize their deductions by writing these expenses off in the current year.

For example, if a taxpayer purchased and placed $1,000,000 of new equipment into service on October 1, 2017, the taxpayer would be able to write off the entire amount of the equipment purchased. This would result in tax savings of approximately $396,000 in 2017. However, if the taxpayer purchased and placed $1,000,000 of equipment into service on January 1, 2018, the approximate savings would be $296,000.

Although the bonus depreciation rules do not apply to real property, investors in real property can still take advantage of the new bonus depreciation rules by conducting a cost segregation study.

Through undertaking a cost segregation study, the investor can identify equipment eligible for these new bonus depreciation rules. Typically approximately 20%-30% of the value of commercial or rental property can be allocated to equipment that is eligible for bonus depreciation. This means that if an investor purchases a building for $10,000,000, and through a cost segregation study identifies equipment worth $2,500,000, the investor can write the $2,500,000 off in the year of purchase. If the investor purchased the property between September 27, 2017 and December 31, 2017, the investor will get an added benefit of being able to write such equipment off at the higher tax rate of approximately 39.6%, rather than the reduced effective tax rate of 29.6% that taxes effect January 1, 2018.

There is thus an incentive for real estate investors to close on purchases before year-end to take advantage of the increased depreciation at the higher rate. Investors should thus try and expedite their closings to take advantage of this limited time opportunity.

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