2022 is the last call for the best of the best bonus depreciation. Bonus depreciation is a MASSIVE tax shielding tool, and it’s starting the phase out in 2023. I go over that in this podcast.
My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out.
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2022 is the last call for the best of the best bonus appreciation. Bonus appreciation is a massive tax shielding tool, and it's starting to be phased out in 2023. I go over that in this video.
Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe and I've been a real estate syndicate and investor for almost 12 years now, and in this time, I've built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out.
There have been loads of videos on bonus depreciation and most are completely boring. While it may not be the spiciest of topics to most folks, it has been an amazing tool for investors ever since the Trump tax cuts of 2017. No matter which way you vote, it's been a great way to shield your capital gains tax in real estate these last five years.
Alright, so how does it work? Bonus depreciation is where you can write off anything with a useful life of 15 years or less off in that same year you acquired the asset, though for us being in the residential real estate and investment world, that could mean carpet, appliances, roofs, et cetera. We have a third-party engineer go out to the asset and they create a lovely packet on what they think has a 15-year useful life or less. We then hand that packet over to our CPAs doing our tax returns at the investment level, and that extra depreciation is passed on to our investors in our investment properties. Typically, an investor would get to write off 50% of their initial investment in that same year. If you invested $100,000 into one of our multi-family investment offerings, you would get roughly a $50,000 write off in that same year.
That write-off can be used to shield capital gains and investment income from other investments. In subsequent years, you would continue to get more depreciation at a lower rate until your capital account gets down to $0. Eventually, you would be able to write off all the remainder of your investment as well over a few years. Now what happens when you sell that asset? Uncle Sam claws that back--the depreciation you took at a lower taxable rate, and then any capital gains you made on that investment property is also taxable. That means you have a decent size tax liability headed your way after a sale, but that tax liability can be covered by a new investment that kicks off bonus depreciation. You continue to kick the can down the road on that tax liability by covering your capital gains liability with new real estate investments that produce more depreciation and the cycle goes on and on.
The trick is to keep doing that until you die, and then your heir's basis in those properties, it’s brought up to the time of your death. The value is brought between your time of death and that entire potential tax liability you racked up over the decades is wiped out.
I liken it to being on a treadmill of buying real estate for the rest of your life once you get going, but that's a first world problem right there. Let's go over of an example and show why this is the last year to get the best of the best depreciation. Say you are a very smart investor and decide real estate syndication is the way to go for you. You want access to great commercial real estate investments, but you don't want the day-to-day headaches that have come from investing and operating single family assets.
You do your homework and find the right syndicator you want to work with, you find an awesome multi-family property to invest in, and you put in $100 K of your own money into that investment. Now, say that property has grown in value and spit out some cash flow back to you guys over the past couple of years. You all sell that property. Let's assume you dealt with your money in that time period. Your $100,000 initial investment grew to $200,000 over that time period. You own the asset. That would mean at the sale. You have a $100,000 capital gain that is going to be taxed with bonus depreciation in play. You find a new multi-family asset to invest in, and you invest a full $200,000 that you got from the sale into this new property. With the bonus appreciation, you can write off $100,000.
Let me say that again. That $100,000 write off would fully offset the capital gains tax that you were going to pay on your asset you just sold. Again, you would pay no capital gains tax on that asset. It's amazing. It's a really powerful tool to be extremely tax efficient and you end up having more of your money growing, as opposed to giving it to Uncle Sam. Now, why is this year the last year for the best of the best depreciation? The Trump tax cuts had this incentive for real estate investors starting to phase out in 2023. We've had a great run at the 100% bonus appreciation level these past few years, but starting in 2023, that goes down to 80%, and then in 2024: 60%, 2025: 40%, and eventually down to no more bonus depreciation. For our investors that jump into a multi-family property in 2022, that means they'll get what's been our typical 50% write off on their initial investment for 2022.
If they come into a multi-family investment in 2023, then we expect the write-off to drop down to 40% of their initial investment, which is not bad, but every little bit of depreciation we can take, can pay off in massive dividends down the road. 2022 is the last year of the best depreciation when investing in real estate. Rack up as much of that as you can, and whatever you don't use can typically be used down the road. Bonus appreciation is being phased out. Jump into any last investment opportunities if you're able to this year.
This has been real estate investing with Kenny Wolfe. Thanks so much for listening.