Have you ever felt like taxes are taking away too much of the money you work so hard to earn?
What if there was a way to keep more of that money and use it to buy more properties or save for financial goals?
This is one of the most powerful tax strategies for real estate investors—bonus depreciation. Let’s explore who benefits from it and how it can help grow a real estate portfolio faster.
Bonus Depreciation and Real Estate Professionals
To take full advantage of bonus depreciation, it’s important to understand what qualifies someone as a real estate professional.
A real estate professional is someone who:
- Spends at least 750 hours per year on real estate activities
- Spends more time on real estate than any other profession
Qualifying activities include:
- Managing properties
- Showing houses
- Overseeing renovations
- Conducting property inspections
- Any real estate-related work
For those who work full-time in another industry while also doing real estate, the real estate hours must exceed those from another job to qualify.
What is Bonus Depreciation?
If qualified as a real estate professional, income is divided into two categories:
- Passive income – Typically rental income
- Active income – Earned from a W-2 job or commissions
The advantage? Bonus depreciation allows passive losses to offset active income, significantly reducing the amount owed in taxes.
An Example of Bonus Depreciation in Action
Consider this scenario:
- $50,000 earned from rental properties
- $80,000 earned from commissions as a realtor
- $40,000 claimed in bonus depreciation on a newly purchased property
That $40,000 deduction can significantly reduce the total taxable income—potentially cutting taxes in half.
This isn’t just about saving on taxes; it’s about freeing up cash flow to reinvest in additional properties.
Who Can Use Bonus Depreciation?
Most real estate investors can use some form of bonus depreciation, but real estate professionals can maximize its benefits in even greater ways.
To qualify for bonus depreciation:
- Own a property
- Ensure it is ready and available for use during the tax year
- Complete a cost segregation study with a certified specialist
A cost segregation study helps determine which property components can be depreciated faster, allowing for larger deductions upfront. These specialists are easier to find than many assume, and working with a knowledgeable CPA can simplify the process.
Why Bonus Depreciation Makes Now the Best Time to Buy Property
A few years ago, 100% bonus depreciation was available, meaning all accelerated depreciation could be claimed in the first year.
However, the percentage has gradually decreased each year, currently sitting at 60%. While there’s hope it won’t decrease further (or might even increase again), there’s no certainty.
Waiting to buy a property could mean missing out on larger tax savings.
For those considering real estate investing, now is the time to take action. This strategy has helped investors reinvest thousands of dollars into new properties instead of losing that money to taxes.
Steps to Take Advantage of This Strategy Tax Saving Strategy
- Talk to a real estate CPA
- Not all CPAs specialize in real estate tax strategies, so finding one who understands the real estate professional designation is crucial.
- Schedule a cost segregation study
- If a property is purchased in December, the study doesn’t need to be completed before the year ends—it just needs to be done before filing taxes.
- Make strategic property purchases
- Ensure investments align with both tax and financial goals to maximize long-term benefits.
Bonus Depreciation Gives Opportunities
With your tax savings from utilizing bonus depreciation, you are able to:
- Buy another property
- Build long-term wealth
- Save for the future
Bonus depreciation isn’t just a tax loophole—it’s a powerful way to accelerate financial growth.
It all starts with taking the first step: connecting with a real estate CPA to explore how this strategy can work for individual investing goals.
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