Two Words: Tax Breaks.
At Ten15 Capital, we have a hyper-focus on helping minorities with wealth creation, wealth preservation and wealth GROWTH. Our core mission is to disrupt the current trend that is the widening the wealth gap. One of the urgencies in getting deals done is to provide much needed tax advantages to our valued partners. Thanks to the Tax Cuts and Jobs Act of 2017, the benefits of owning apartment complexes are more favorable than ever before due to accelerated depreciation and the juicy bonus depreciation. However, these perks are due to expire by the end of 2022... hence, the urgency.
Accelerated Depreciation allows non-structural elements and land improvement to be depreciated over shorter time schedules of 5, 7, and 15 years as opposed to standard straight-line depreciation of 27.5 or 39 years. Put in easier terms, it brings the depreciation forward so you can take advantage of the depreciation within the first 5, 7 and/or 15 years of ownership.
Bonus Depreciation is a form of accelerated depreciation. The difference, it allows you to take 100% of the accelerated benefit and utilize it all in year one of ownership. You read that correctly. There are some items identified in the Accelerated Depreciation schedule that qualify and are identified after performing a Cost Segregation Study. What this study does is creates two asset classes: the “real property” bucket and the “personal property” bucket. Items identified as "personal property" may now be eligible for bonus depreciation and can be immediately expensed in the first year of ownership.
It's an amazing perk. It's what makes real estate ownership have such an advantage over any other asset class, pound for pound.
How it works.
First, what exactly is a Cost Segregation Study? A Cost Segregation Analysis is performed by a professional with experience in engineering, architecture, construction, and tax accounting. This process converts a property from Section 1250 to a combination of Section 1250 and Section 1245 property.
Section 1250 Property - a residential real property subject to 27.5-year straight-line depreciation
Section 1245 Property - tangible personal property
The study will identify and separate certain qualified items that would normally be considered 1250 property and reclassify them as 1245 property, or "personal property."
This could include, for example:
The electrical system.
Appliances.
Computer software.
Carpeting.
Wall coverings.
The ventilation system.
Special plumbing.
Lighting fixtures.
Process piping.
Example.
A syndication team purchases an apartment community worth $10-million. After performing a cost segregation study, the professional deems they can reclassify 10 percent of those costs to be personal property. By assigning these assets a shorter depreciable life, they can apply bonus depreciation and write off $1 million of that $10-million purchase price in Year 1. The syndication team would save $250,000 in taxes, or 2.5-percent of the purchase price, after that first year of ownership. That savings is shared through the investment partners, meaning every investor would get their portion of the $1M write-off based on their share ownership. I have seen $40-60k in these "paper losses" (net loss for tax purposes) per $100k investment on previous deals that I have been a part of be distributed via Year 1 Schedule K-1 document. Keep in mind, every deal is different!
How to use these savings.
Losses from rental property are considered passive losses and can be used to offset other passive income, such as income from other rental properties and income from another business in which you do not materially participate. Here is another huge perk... If these passive losses exceed your passive income, they are suspended and carried forward indefinitely until future years, when you either have passive income or sell a property at a gain.
In terms of cash flow, which is what we are targeting for our partners, this means your dividends are essentially offset by the paper losses, essentially rendering them completely tax deferred.
This is good news because a paper loss means you aren’t paying taxes on your rental income today, even if you have positive cash flow.
What this means to you.
Stronger cash flow.
Less tax burden.
This wealth secret weapon is available to us!!
This is why investing passively in syndications is so awesome and clearly outpaces any other investment class. The tax advantages of real estate really get put on steroids when you go multifamily.
I would love to see you participate in our next deal so that you too could use this secret weapon to:
CREATE your wealth
GROW your wealth
PROTECT your wealth
We use professionals to perform a Cost Segregation Analysis to determine Accelerated Depreciation. It’s important to contact an expert real estate tax specialist or accountant to discuss the benefits of cost segregation and accelerated depreciation. I am not a tax professional nor an accountant, and this shouldn't be taken as advice. This post is for informational purposes.
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We are Ten15 Capital, and we are innovating the world of real estate investing via apartment complexes. We create lucrative opportunities via syndication or joint venture projects.
To learn more, please go to our website: www.Ten15.co
