Depreciation Analysis in Real Estate

We're building a $20M apartment building with $8M of investor equity. In Year 1, our investors are projected to receive over $5M in bonus depreciation, a paper loss equivalent to ~65% of their initial investment. Here's a quick playbook on how that works, and the "super-move" that can make those tax savings permanent. How Bonus Depreciation Works: Normally, you write off a building over 27.5 years. But through a Cost Segregation Study, we can identify parts of the asset with shorter lifespans (like appliances, flooring, and site work) and accelerate decades of deductions into Year 1. Who can use this loss? ➡️ Passive Investors: Can use the deduction to offset other passive income (e.g., from other rentals or partnership K-1s). ➡️ Real Estate Professionals (REPs): Can use the deduction to offset all income, including W-2 or active business income. (Any unused losses can be carried forward to future years.) The Catch: Depreciation Recapture That giant $5M deduction isn't a free lunch forever. When a property is sold, the IRS can "recapture" the depreciation you claimed and tax it at rates up to 25%. But there are two powerful ways to plan for this. The Solutions: Deferral vs. Elimination Path #1: The 1031 Exchange (The Deferral) You can sell the property and roll the proceeds into a new one. This defers both capital gains and the depreciation recapture tax. You're essentially kicking the can down the road. Path #2: The Opportunity Zone (The Elimination) This is the super-move. If the project is structured within an OZ fund from day one and held for 10+ years, our investors get: ✅ No capital gains tax on the sale. ✅ No depreciation recapture. The upfront $5M deduction becomes a permanent, tax-free benefit. This isn't theory—this is the exact structure we're using for our current $20M project. For the investors and CPAs here: When you're evaluating a deal, how much weight do you put on the after-tax benefits like bonus depreciation and its exit strategy?

Here’s a real-world example of how tax strategy can make a huge impact on your bottom line… In 2023, my company Sunrise Capital Investors acquired a mobile home park for $44.45 million. Normally, you’d take the land value out (about $7.3M in this case), and depreciate the rest—roughly $37 million—over 27.5 years. That would have given us $1,349,163 of depreciation "losses" per year. That’s a good start, but we didn’t stop there. We brought in a cost segregation team—and what they uncovered was powerful. Cost segregation involves strategically breaking down a mobile home park’s individual components to depreciate the asset as quickly as possible. By identifying all depreciable assets within the property and assigning them their proper categories and depreciation schedules, you can further compress the timeline. Our cost segregation team found that 97% of the property (around $36M) could actually be depreciated over 15, 7, or even 5 years. Translation: significantly more depreciation, much sooner. To take this a step further, we were able to speed up the timeline with bonus depreciation. Bonus depreciation is an incentive that allows mobile home park owners to accelerate the depreciation of assets with depreciable lives of less than 20 years, enabling them to deduct a substantial portion of the property's cost in the year the investment is made. Using this same acquisition example, by combining cost segregation with bonus depreciation, we could depreciate nearly $29 million (80% of $36 million) in 2023 for this property. This is a significant increase in depreciation losses compared to the $1 million with standard depreciation alone. Utilizing this strategy meant that investors who participated in this acquisition received 135% of their invested capital as a "passive loss" on their 2023 K-1, potentially resulting in extraordinary reductions in taxes owed on passive gains for that year and future years since the losses may be carried forward. Since then, the laws around bonus depreciation have changed. In 2025, the percentage that can be deducted in the first year dropped to 40%, and it will continue to decrease in subsequent years with current legislation. However, it is possible, even likely, that new legislation will be passed in the near future to bring back these benefits. Utilizing cost segregation and bonus depreciation are two kinds of strategies we use every day to help our investors build real, lasting wealth. If you’re not leveraging tools like this in your real estate strategy, you’re leaving money on the table.

𝐖𝐡𝐨 𝐬𝐚𝐲𝐬 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 𝐢𝐬𝐧’𝐭 𝐢𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐭? Here’s a real example from a recent property purchase by one of our clients. For the last financial year (1 July 2024 to 30 June 2025), they’ll be claiming $𝟐𝟐,𝟗𝟏𝟑 𝐢𝐧 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 on the property – purely from wear and tear on the building and fittings. 𝐖𝐡𝐲 𝐝𝐨𝐞𝐬 𝐭𝐡𝐚𝐭 𝐦𝐚𝐭𝐭𝐞𝐫? He’s in the top tax bracket (45%), so this will result in a 𝐭𝐚𝐱 𝐬𝐚𝐯𝐢𝐧𝐠 𝐨𝐟 𝐨𝐯𝐞𝐫 $𝟏𝟎,𝟎𝟎𝟎 – just from depreciation alone. That’s a significant boost to the cash flow – without changing anything about the way the property is managed. Too often, investors overlook depreciation. But it’s one of the easiest ways to improve your property’s cash flow and reduce tax legally. Whether it’s a new build or a recent renovation, a depreciation schedule can make a serious difference. 𝐒𝐦𝐚𝐫𝐭 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐲 𝐢𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠 𝐢𝐬𝐧’𝐭 𝐣𝐮𝐬𝐭 𝐚𝐛𝐨𝐮𝐭 𝐰𝐡𝐚𝐭 𝐲𝐨𝐮 𝐛𝐮𝐲 – 𝐢𝐭’𝐬 𝐚𝐥𝐬𝐨 𝐚𝐛𝐨𝐮𝐭 𝐰𝐡𝐚𝐭 𝐲𝐨𝐮 𝐜𝐥𝐚𝐢𝐦. While older properties may offer value in other ways, 𝐧𝐞𝐰𝐞𝐫 𝐨𝐫 𝐧𝐞𝐰𝐥𝐲 𝐢𝐦𝐩𝐫𝐨𝐯𝐞𝐝 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐢𝐞𝐬 𝐨𝐟𝐭𝐞𝐧 𝐝𝐞𝐥𝐢𝐯𝐞𝐫 𝐬𝐢𝐠𝐧𝐢𝐟𝐢𝐜𝐚𝐧𝐭𝐥𝐲 𝐠𝐫𝐞𝐚𝐭𝐞𝐫 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 𝐛𝐞𝐧𝐞𝐟𝐢𝐭𝐬 – and that can’t be ignored. #propertyinvestment #depreciation #investmentproperty #realestateinvesting #cashflow PropVest BMT Tax Depreciation Quantity Surveyors

Depreciation is legal magic in real estate. You buy a building. It goes up in value. Cash flow is positive. And the IRS says you lost money. This isn't a loophole. It's the tax code working exactly as designed. The IRS assumes your building is "wearing out" over time. Every year, you deduct a portion of the building's value from your taxable income. Here's what this looks like on a real deal: $1M property (building: $800K, land: $200K) $70K annual cash flow 27.5-year depreciation schedule The Math: Annual depreciation: $800K ÷ 27.5 = $29,090 You collected $70K in real cash. But on paper, you "lost" $29K. Taxable income: $70K – $29K = $40,910 You only pay taxes on $41K. You keep $70K. That's a 41% reduction in taxable income without spending a dollar. Now let's accelerate it. Cost segregation reclassifies parts of your building into shorter depreciation schedules. Same $1M property? Year 1 depreciation jumps to $150K+ instead of $29K. Your $70K cash flow isn't just tax-reduced. It's tax-eliminated. This is how generational wealth gets built: 1. Cash flow today 2. Paper losses on your return 3. Defer taxes through 1031 exchanges 4. Step-up in basis when you pass it on Your heirs inherit at current market value. All that deferred depreciation? Wiped clean. This is why real estate investors pay less in taxes than W-2 earners making half as much. Not because of shady loopholes. Because the tax code rewards ownership. Are you using depreciation strategically, or just letting your CPA check a box?

Cost Segregation = Accelerated depreciation With the new tax bill set to pass, which revives bonus depreciation (from 60% back to 100%), cost segregation in 2024 becomes an even more lucrative option. Imagine you purchase a hotel for $1.5 million in 2024. In a traditional depreciation scenario without cost segregation, you'd depreciate the entire property (excluding land) over 39 years. Let's say the land value is $300,000. So, the depreciable value of the building is $1.2 million. Without cost segregation, your annual depreciation would be about $30,769 ($1.2 million divided by 39 years). Now, let's apply cost segregation. You conduct a study and find that certain assets within your hotel can be classified differently: 5-Year Property: This includes items like computers, furniture, and some types of fixtures. Let's say these are valued at $200,000. With cost segregation, these can be depreciated over 5 years. 15-Year Property: This category often includes improvements made to land, like landscaping or parking lots. Suppose these are valued at $100,000. 39-Year Property: This is the remaining value of the building after subtracting the 5-year and 15-year properties, which is $900,000. Bonus Depreciation: Additionally, you decide to apply bonus depreciation for the 5-year property. With current tax laws, let’s assume you can take 100% bonus depreciation in the first year for these assets. Here's how it breaks down: 5-Year Property: $200,000 can be fully depreciated in the first year due to 100% bonus depreciation. 15-Year Property: The $100,000 for land improvements can be depreciated over 15 years, equating to about $6,667 per year. 39-Year Property: The rest of the building, $900,000, continues to depreciate over 39 years, which is about $23,077 per year. So, in the first year, your depreciation deductions would be: $200,000 (5-year property with bonus depreciation) + $6,667 (15-year property) + $23,077 (39-year property) Totaling: $229,744 in depreciation expense in year 1. In subsequent years, until year 5, your annual depreciation would be: $6,667 (15-year property) + $23,077 (39-year property) Totaling: $29,744 in depreciation expense in year 2-5. From year 6 onward, your annual depreciation would be just the 39-year property value, $23,077, until the property is fully depreciated. This approach significantly enhances your cash flow in the first year and continues to provide benefits over the following years, compared to the flat annual depreciation of $30,769 without cost segregation. It's important to remember that land is not depreciable, which is why its value was excluded from the calculations. Sure, you have to pay for a cost segregation study, but it often pays off by giving you these bigger tax breaks early on. So, it's a practical way to manage your taxes and get more cash flow when you might need it most. #CostSeg2024 #HotelTaxHack #DepreciateSmart #RealEstateSavings

Rental property Investors are often unaware of what “recapture” of depreciation means when they sell a property with a gain, so here is a simplified example of how it works. First there are 2 kinds of recapture, i.e., section 1245 which is the bonus/179 depreciation taken using cost segregation, or the equipment, appliances, etc. you bought and wrote off—the recapture rate is a maximum 37% on that type of property. Then the residential building using 27.5 yr straight line section 1250 depreciation is recaptured at a 25% rate compared to 20% which is the long-term capital gain rate. Assume a rental condo was bought for $1M and sold for $1,150,000,: SL Depreciation was $25,000 per year for 5 years, no 1245 prop. The adjusted cost basis would be $875,000, i.e., the book value. (1M – 125k) Therefore, the gain from the sale is $1,150,000 – $875,000 = $275,000. In this case, not all of it will be taxed as a long-term capital gain. Within $275,000, $125,000 is taxed at a max of 25% noted on a K-1 as “unrecaptured 1250 property”. $150,000 will be taxed at 20%. $125,000 * 25% = $31,250 $150,000 * 20% = $30,000 Total tax             =  61,250 If your income is over 250k there is 3.8% tax surcharge. And, the big losses due to 1245 cost-seg write offs may be suspended due to a 25k limit.

The new tax bill passed last week just brought back one of the most powerful tools in real estate investing: 100% Bonus Depreciation It's essentially doubled the depreciation deduction in the first year for our investors. Example: On Heritage Square, the estimated 2025 deduction was $40k on an example $100k investment. Now its ~$80k deduction for those investors. What that means in simple terms: When we acquire a property, we perform a cost segregation study that splits the building into components (carpet, fixtures, appliances, etc) With 100% bonus depreciation, investors can write off most of those components in year one—even though the asset will produce income for years. -> On paper: the property shows a loss. -> In reality: the property is cash flowing. It’s one of the few legal ways to make money while reducing your taxable income. This is why high-income investors, especially doctors and professionals, love multifamily investing. It’s not just about cash flow—it’s about tax efficiency. We structure every Focused Capital deal with this in mind. ✅ Bonus depreciation ✅ Cost segregation ✅ Passive losses that can offset other gains Can many of our investors take advantage of this depreciation deduction? Yes. Consult your CPA about your situation to see how it pertains to you.