Real Estate Tax Benefits

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?

The 1031 Exchange: Why Are So Many Family Offices Still Missing This? Each year, we conduct the largest Family Office real estate investing study in the country. And every year, one statistic continues to stand out: around 80 percent of Family Offices have never executed a 1031 exchange. That number is hard to ignore. Especially when the 1031 exchange remains one of the most effective tools for deferring capital gains tax in real estate. So why are so many families sitting this one out? A properly executed 1031 exchange allows real estate owners to defer capital gains tax by reinvesting the proceeds from a sale into another like-kind property. This deferral can be repeated again and again, effectively rolling gains forward through each transaction. Eventually, if the assets are held until death, the heirs receive a step-up in basis to the current market value. That means the unrealized gains disappear from a tax standpoint, and no capital gains tax is ever paid on those increases. In other words, it is one of the few structures that rewards long-term planning and multigenerational thinking. There are a few consistent reasons we hear from families who have avoided the 1031 exchange: 1. Lack of awareness. Some families simply haven’t been exposed to the mechanics or long-term value of the strategy. 2. Complexity. The rules and timelines around 1031 exchanges can feel restrictive, especially when a sale is moving quickly. 3. Limited planning. Too often, families are focused on the immediate transaction rather than a multi-transaction strategy that supports long-term wealth preservation. These are all addressable with the right education and advisors in place. The 1031 exchange is not just a tax strategy. It is a long-term planning mechanism that aligns perfectly with the goals of capital preservation and intergenerational wealth transfer. When used correctly, the benefits compound over time. Deferred taxes remain invested, growth accelerates, and estate planning becomes significantly more efficient. Every Family Office that owns real estate should understand how a 1031 exchange works. More importantly, they should have a clear plan for when and how to use it. Ignoring this tool leaves value on the table and creates unnecessary tax exposure.

Depreciation Recapture: Usually, when an entity invests in Fixed Assets (personal or real property), they get a deduction of depreciation expense on the purchased assets. This expense helps them reduce the ordinary/rental income (depending on the nature of the business). Now, suppose if the entity disposes these fixed assets after certain years of use. What will be the effect of Gain/Loss on Sale? Most of us would think that it will be Captial Gain/Loss and will be taxed at preferential rates, right? But the answer is no. When the asset is disposed of for Gain, the amount of depreciation already claimed on the asset until the date of disposal (i.e. Accumulated Depreciation) is recaptured as an Ordinary Gain instead of considering full gain as Capital Gain. Hence, no preferencial Tax Rate benefit for the portion of depreciation already claimed. These assets are generally classified as section 1231 Assets. Section 1231 assets generally are: - Any Personal or Real Property used in trade or business AND - Held for more than 12 months Section 1231 assets are further classified into two types: Section 1245 Assets: - Any Personal Property used in trade or business AND - Held for more than 12 months Section 1250 Assets: - Any Real Property used in trade or business AND - Held for more than 12 months Any gain from the above two types of properties is recaptured and is taxed at Ordinary Rates to the extent of Depreciation Expense already claimed on them. Any gain in excess of depreciation will be treated as Section 1231 Gain (i.e. Capital Gain) and will br reported on Schedule K, Line 10 (Form 1065) or Line 9 (Form 1120S). If any of these assets are sold at loss, the entire loss will be classified as 1231 Loss and will be reported as Ordinary Loss allowing deduction against ordinary income. Section 1231 Loss can only be offset against Section 1231 Gains. For more such posts, kindly follow Saloni Desai #depreciation #recapture #irs #section1231 #section1245 #section1250 #ordinarygain #capitalgain

Most founders will hand the IRS millions at exit. Not because they have to. Because they didn’t plan. Here’s what Qualified Small Business Stock (QSBS) changes: Section 1202 allows founders to exclude up to $10M in capital gains from federal taxes when selling qualified stock. Zero tax on: - Capital gains - Net Investment Income Tax (3.8%) - Alternative Minimum Tax But here’s the catch most founders miss: You need to file an 83(b) election WITHIN 30 DAYS of receiving restricted stock. This starts your 5-year holding period clock immediately, even before your shares vest. Miss this deadline, and you could lose millions in tax savings. The 3 critical requirements: → Your company must be a domestic C-Corp → You must hold the stock for 5 years minimum → Gross assets under $50M at issuance ($75M for stock issued after July 4, 2025) Example: A founder with a $2M basis could potentially exclude up to $20M in gains (the greater of $10M or 10x your basis). Always work with your Tax Advisor! Are you planning your exit strategy with QSBS in mind?

“I’d Sell the Property, But the Tax Will Eat Me Alive.” Ever had that thought? But let me tell you something no one explains properly. Meet Raj. Back in 2001, Raj bought a house for ₹1 crore. It was a big deal. His first major investment. Fast forward to 2025, Raj gets an offer he can’t refuse: ₹10 crore for the same house. He thinks, “This could change everything, retirement, kids’ future, maybe even that Goa cafe dream.” But then comes that voice, "₹9 crore profit? You’ll lose a fortune in tax." And just like that, Raj pauses. The Fear Is Real This is where most people stop. They want to sell. They should sell. But the fear of getting slammed with tax holds them back. And here’s the tragic part: most of that fear is based on wrong math. What No One Talks About — CII Let’s break this down. CII stands for Cost Inflation Index. Literally the thing that protects you from being taxed unfairly. It adjusts the original price of your asset based on inflation, because money changes over time. ₹1 crore in 2001 could build a bungalow. ₹1 crore in 2025? Maybe a 2BHK in a decent city. So why should you pay tax like nothing’s changed? Raj’s CA Breaks It Down: “Relax. You’re not paying tax on ₹9 crore. You’re paying tax on ₹6.24 crore.” Here’s the math: CII in 2001 = 100 CII in 2025 = 376 That means the ₹1 crore Raj spent back then is worth ₹3.76 crore in today’s terms. So: ₹10 crore (sale price) – ₹3.76 crore (adjusted cost) = ₹6.24 crore (actual gain) Taxed on ₹6.24 crore, not ₹9 crore. He just saved tax on ₹2.76 crore, legally. The Real Problem? Most people don’t know this. They hear “capital gains tax” and immediately think they’ll lose their shirt. So they hold onto the property, keep postponing the decision, and miss the window when the market is hot. This hesitation, this fear of the unknown tax hit, quietly stalls so many real estate deal, especially among older owners sitting on legacy property. But Here's the Thing: CII is the law. It's built to make sure you're taxed on real gains, not inflated ones. You’re not “saving” tax. You’re paying what’s fair, no more, no less. What Does This Mean For You? If you’ve been holding onto a house, land, or long-term asset and thinking: “I want to sell, but the tax will be massive…” “It’s not worth the hassle right now…” “Maybe I’ll just wait a few more years…” Stop. Run the numbers with CII. You might realize the tax hit is way smaller than you feared. You might actually be in the perfect position to sell, reinvest, or unlock that next chapter in your life. Bottom Line: For FY 2025–26, the CII is 376 If you bought property long ago, adjust your original cost using CII Pay tax only on real, inflation-adjusted profits Raj almost walked away from a ₹10 crore deal because of a number he didn’t understand. You don’t have to make the same mistake. Ask the right questions. Run the right calculations. And if you need help? Let’s talk. #kamalkisoch

₹26 Crore Capital Gain. Zero Tax. Legally. A recent ITAT Kolkata ruling has reinforced an important principle under Section 54F. A taxpayer sold listed shares and earned ~₹26 crore in long-term capital gains. She invested in the construction of a residential house and claimed exemption under Section 54F. The department denied it on three grounds: • She allegedly owned more than one residential house • Construction had begun before the date of sale • Sale proceeds were not directly used for construction The Tribunal rejected all three objections. Key takeaways: 1️⃣ Joint ownership of a house does not amount to exclusive ownership for disqualification under Section 54F. 2️⃣ Vacant land with a tenant-constructed factory is not a “residential house.” 3️⃣ Construction need not begin after the date of transfer. The law only requires completion within 3 years. 4️⃣ There is no requirement that the exact sale proceeds must be directly utilised for construction. Result: ₹26 crore exemption allowed. Tax demand deleted. The larger lesson? Tax planning within the framework of law is not tax evasion. Interpretation matters. Documentation matters. Substance matters. When you comply with the conditions, the law protects you.

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

While depreciation and the ability to shelter income is one of the many modern miracles in commercial real estate, beware of the very important, not often discussed, and often overlooked consequence that is created through this process called: Depreciation Recapture.   Unless you are going to do a 1031 exchange, when you go to sell your investment property, the IRS will tax you at ordinary income rates up to 25% of the total amount of depreciation you’ve taken over the life of your ownership of the asset.   This becomes especially punitive if you have come close to fully depreciating the asset in a short period of time by way of using cost segregation.   While cost segregation is truly a great IRS approved tool to shelter income many owners are unaware of depreciation recapture and the financial implications and complications it creates when considering selling an asset.   *Disclaimer* I’m not a CPA or tax advisor, but I strongly encourage you to speak to one before making any decisions relating to this topic.

Think depreciation recapture is just ordinary income tax?  Think again. Your wallet might disagree. Many assume depreciation recapture is taxed like ordinary income, but that’s not the case. In reality, it’s taxed differently. For real estate, recaptured depreciation can be taxed up to 25%, which is significantly higher than the typical capital gains rate but lower than ordinary income rates. For personal property like equipment, recaptured depreciation is taxed as ordinary income up to your marginal tax rate. Any additional gain beyond the recaptured amount is taxed at the long-term capital gains rate if the asset was held for over a year. Overlooking this can lead to unexpected tax bills and surprising costs when selling your property or equipment. To manage this, understanding the details is essential. Depreciation recapture isn’t just a formality; it’s a crucial part of financial planning. Smart CFOs plan ahead: They factor in recapture from day one, set aside funds, time sales strategically, and maximize after-tax profits. Don’t let recapture catch you off guard.  Understand it.  Plan for it. Your bottom line and shareholders will thank you. #depreciationrecapture   #taxes   #finance

Beware depreciation recapture. It’s one of those tax concepts that sounds straightforward – until you actually run the numbers. [This week’s carousel covers cost segregation studies. If you'd like the complete tax guide I edited (written by real tax pros), just comment ‘Tax guide’ or DM me and I’ll send you the link.] Here’s how depreciation recapture works, in plain English: -> You buy a property for $1 million. That’s your starting basis. -> Over the time you own it, you take, say, $800,000 in depreciation. -> At time of sale, your adjusted basis is now $1 million - $800,000 = $200,000. -> If you sell for, say, net $2 million, your gain is $2 million (net sales price) minus $200,000 (adjusted basis) = $1.8 million. You'll pay federal and, possibly, state long-term capital gains tax (assume around 20% total for this example) on the $1.8M gain, the difference between sale price and adjusted basis, so 20% x $1.8 million = $360,000 So far, so good. But here’s the twist: The IRS doesn’t let you walk away tax-free on that $800K you depreciated. Instead, it recaptures that portion and taxes it separately at 25%. So your tax bill might look like this: -> $360,000 in capital gains tax (20% of $1.8 million of gain) -> $200,000 in depreciation recapture tax (25% of $800,000) = Total: $560,000 – for a total of 31% of your overall profit. Not trivial. Worth understanding if you're planning to sell – or just want to sharpen your tax strategy. [If you know what the exact percentages are for capital gains and/or depreciation recapture, or have any other nuances to share, please add them to the comments below.] P.S. The tax guide I edited is detailed and written by qualified tax experts. Comment ‘Tax guide’ or DM me if you’d like a copy. CYA: This is not tax advice. AAA - Ask An Accountant!