By Terri S. Johnson, CRE
The multifamily real estate market remains steady and robust. Along with the opportunity to earn rental income, multifamily projects offer a number of tax benefits to the thoughtful investor. In fact, we’re finding that investors view the tax savings associated with cost segregation as a major reason to consider the multifamily sector. Recent provisions in the CARES Act and 2017’s Tax Cuts and Jobs Act (TCJA) have brought depreciation deductions to an all-time high. The TCJA established a 100% bonus depreciation rate through the end of 2022. The impact of 100% bonus depreciation on tax savings cannot be overstated, but time is running out on this valuable incentive. As shown in Table 1, the bonus depreciation rate will step down by 20% a year beginning Jan. 1, 2023.
Here is an example to illustrate the effect of this step-down. Property ABC, a garden apartment complex, was acquired and placed in service in September 2018 with a total depreciable basis of $37,445,200. Engineers were able to move 18.7% of assets into five-year personal property, and another 7% of assets into 15-year land improvements. When 100% bonus depreciation is in play, there would be a first-year tax savings of $3,142,872.
However, once bonus depreciation begins to step-down, the scope of savings decreases commensurately, as seen in Table 2.
Now is the time for investors to move forward with new construction and acquisitions if they want to be assured of the 100% bonus depreciation.
When used in tandem with other tax strategies, 100% bonus depreciation is even more valuable:
These strategies – with the possible exception of 45L – will be around even after the bonus depreciation step-down begins. But to maximize real estate tax savings, the time is now. Do you have a new construction planned? Want to acquire a new-to-you property? Considering a renovation? Planning your project timing around tax benefits can have a major impact and this should be considered when meeting with your CPA.
A quality cost segregation study is the key to maximizing tax savings on multifamily properties, or really any type of commercial real estate. The study allows you to leverage a combination of strategies old and new, increasing cash flow, reducing tax liability, and teeing you up for better days ahead.
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