Many investors don’t know or understand the bonus depreciation that is being provided as part of the Tax Cuts and Jobs Act of 2017; which is a shame because it is not available indefinitely.
1. Why is the bonus depreciation being provided?
To encourage investors to purchase real estate by deducting a significant amount of their investment within the first year, thereby providing substantial reductions on their taxes.
The year 2023 allows investors to deduct up to 80% of the bonus depreciation in the first year. For example: An 100K investment in real estate could generate a bonus depreciation of 80K in the first year. This can reduce your capital gains from another investment by 80k! We leveraged this option last year when selling a single-family rental property by offsetting its capital gains with the bonus deprecation from investing in multifamily deals.
Multifamily properties achieve the bonus deprecation through mechanisms such as cost segregation studies to provide the tax deductions back to the investors.
2. Why is bonus depreciation more important than interest rates?
Economics are more important than interest rates, even when those rates are elevated. This is because good investment opportunities occur when the cost basis (purchase price) is lower, creating a market that favors those who have capital to take action.
The bonus deprecation helps to offset the capital gains from other investments, making the economics of a new property viable over market timing that attempts to get the best initial interest rate. Combined with options such as the 1031 exchange, these financial tools provide incentives to invest (and reinvest) into more real estate with little to no tax implications.
3. What does it mean to everyone as investors?
This allows businesses to expand rapidly by also reinvesting in their operations while stimulating the economy. It also enables individuals to grow their wealth quickly through continued tax incentives.
The incentives provided by the government exist because they want you to invest in real estate and are enabling the potential for greater rewards. As a result, your Return on Investment (ROI) increases exponentially!
4. Why does the government want more investment in real estate?
Because multifamily fundamentals haven’t changed. There is still a shortage of housing in the US by an estimated 2.3 million homes. And single family housing is increasingly out of reach for many with the elevated interest rates and cost basis. This pattern means the price gap between acquiring housing vs. renting continues to widen, with more electing or needing to live in multifamily properties.