Understanding Bonus Depreciation for Multi-Family
Bonus depreciation allows immediate expensing of qualifying property rather than spreading deductions over the asset's recovery period. For multi-family properties, components identified through cost segregation as 5-year, 7-year, and 15-year property may qualify for bonus depreciation, significantly accelerating tax deductions.
The Tax Cuts and Jobs Act of 2017 expanded bonus depreciation to 100% for property placed in service after September 27, 2017 through 2022, with scheduled phase-downs beginning in 2023. Understanding the current bonus depreciation percentage and planned reductions helps time your cost segregation study for maximum benefit.
Qualifying property for bonus depreciation includes tangible personal property with recovery periods of 20 years or less and certain land improvements. For multi-family properties, this encompasses components such as appliances, flooring, cabinetry, site improvements, and specialized building systems identified through cost segregation.
Used property can now qualify for bonus depreciation, a significant change from prior rules. Multi-family acquisitions of existing properties benefit from this expansion, allowing accelerated deduction of component costs regardless of prior ownership history.
Bonus Depreciation Phase-Down Schedule
The bonus depreciation percentage decreased to 80% for property placed in service in 2023, 60% for 2024, and 40% for 2025. Further reductions to 20% in 2026 and elimination after 2026 are currently scheduled, though future legislation could modify these phase-downs.
Placed-in-service date determines which bonus depreciation percentage applies. For multi-family acquisitions, this is typically the closing date for existing properties or the completion date for new construction. Planning acquisitions and renovations around these dates can significantly impact tax benefits.
Phased developments with buildings placed in service across multiple years may have different bonus depreciation percentages apply to different phases. Understanding this complexity helps optimize construction timelines and tax planning.
Congressional action could modify the phase-down schedule. Staying current on legislative developments helps multi-family investors make informed decisions about acquisition and renovation timing. Your tax advisors and cost segregation professionals should monitor these developments on your behalf.
Strategic Considerations for Multi-Family Investors
Accelerating acquisitions to capture higher bonus depreciation percentages may make economic sense when tax savings exceed any additional costs of earlier purchase. Running projections comparing current-year versus delayed acquisitions quantifies this tradeoff.
Renovation timing becomes more important as bonus depreciation phases down. Completing value-add improvements while higher percentages remain available maximizes tax benefits on renovation costs. This may influence renovation scheduling across your portfolio.
The interaction between bonus depreciation and passive activity rules affects benefit timing for some investors. Significant bonus depreciation deductions may create passive losses that cannot be used currently. Understanding these limitations helps set realistic expectations for cash tax savings.
Disposition planning must account for depreciation recapture. Accelerated depreciation through bonus depreciation increases future recapture tax upon sale. Investors should understand this tradeoff between current-year deductions and future tax obligations.
How Goodlane Group Navigates Bonus Depreciation
Goodlane Group helps multi-family investors understand how current bonus depreciation rules affect their specific situation. We work with your tax advisors to model scenarios showing the impact of different timing decisions on overall tax benefits.
Our preliminary cost segregation estimates include projections of bonus depreciation benefits under current rules. This information helps you evaluate potential tax savings and make informed decisions about study timing and investment planning.
We monitor legislative developments affecting bonus depreciation and communicate relevant changes to clients. When rules change, we help you understand implications for pending and future transactions.
Beyond bonus depreciation mechanics, Goodlane Group provides comprehensive support for multi-family tax planning including cost segregation coordination, basis allocation, and disposition strategy. We help you optimize tax benefits across your entire ownership lifecycle.