Investment Property Depreciation

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.

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?

At first glance, a 15% return from a real estate investment may appear equal to a 15% total return from stocks. But here’s what’s missing: When comparing investments, many focus on gross returns. But the real question should be: how much do I actually get to keep? Let’s say you invest $100K in a real estate deal and get a 6% annual distribution from the sponsor. That’s $6,000 a year in cash flow. Your K-1 may show a taxable loss—even though the property is generating positive cash flow—because of depreciation. Depreciation is a non-cash expense. This paper loss may offset taxable income depending on your passive income and tax status. Even though the property might be making money, the IRS lets you deduct a portion of the building’s value every year for “wear and tear.” That lowers your taxable income, many times to a negative number. So now you’re collecting this $6,000, and depending on your tax situation, you may not owe taxes on it immediately, especially if depreciation offsets the income and you qualify under passive activity rules. This often continues until there’s a capital event, such as a sale or refinance, which may result in a recapture tax and taxable gain. _____ Now compare that to stocks. You don’t have depreciation. If you receive dividends or you sell for a gain, you’re paying taxes. So even if a stock returns 10%, you might only record an 7%-8% return after taxes. And at the end of a real estate deal (let’s say after 5 years), you sell or refinance the property. After a capital event, now you’ve got a bigger chunk of money coming in, and more than likely, that’s going to be taxed. But the cool part is, you can potentially use a 1031 exchange. If you invest directly or the sponsor structures a 1031 exchange at the entity level, you can roll proceeds into a new deal and defer taxes - as long as you identify the next property within 45 days. This means you can keep growing your portfolio without reducing your investable capital. And that’s the key. These advantages compound. You’re not just saving money in year one, you’re reinvesting more capital, tax-deferred, again and again. And you’re earning cash flow that’s often shielded from taxes year after year. It’s a totally different equation. So while real estate might look like it has a 15% return in well-executed value-add deals, the reality may be much better when compared to stock returns, especially when you compare after-tax results. In the end, it isn’t about hitting the biggest number on paper. It’s about keeping more of the upside and letting it work for you over the long run. Have you already experienced the benefits of tax-efficient real estate investing?

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

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

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?

A client once told me, “My CPA said I’m already taking depreciation, so I’m good.” He wasn’t good. Not even close. He owned a 48-unit multifamily in Tennessee. Great property, strong cash flow, and on paper, a massive tax bill. When I asked if his CPA ever broke down the property by asset type, there was silence on the line. That silence is how most investors lose hundreds of thousands of dollars without even knowing it. We did a cost segregation study and found more than $900,000 that could be accelerated depreciation. That translated to hundreds of thousands in immediate tax savings. He was blown away. “I wish someone had told me about this five years ago.” Here’s the truth: Most investors don’t have a tax problem. They have a knowledge problem. Cost segregation isn’t just a tax strategy. It’s the difference between hoping for better returns and creating them. If you own real estate and haven’t looked into it yet, start asking better questions. The answers could change your bottom line. Questions? #weissadvice

There was a “catch” in the Big Beautiful Bill this summer. & it’s worth discussing. The “Big Beautiful Bill” this summer brought back the ability to deduct 100% of eligible property in the year it’s placed in service. But here’s the catch: 100% bonus depreciation only applies to assets with a depreciable life of 20 years or less. Apartment buildings themselves have a depreciable life of 27.5 years (39 years for commercial). That means you cannot take bonus depreciation on the whole building. Where the Opportunity Lies Through a cost segregation study, parts of a multifamily building can be reclassified into shorter-lived asset categories that do qualify for 100% bonus depreciation: • 5-Year Property: Appliances, carpets, furniture • 7-Year Property: Office equipment • 15-Year Property: Sidewalks, fences, landscaping, parking lots • Qualified Improvement Property (QIP):  ↳ Interior upgrades in nonresidential buildings Why This Matters for Investors 1. Bigger deductions in year one mean stronger cash flow. 2. Bonus depreciation can enhance your after-tax IRRs. So, when you hear an operator say “100% bonus depreciation is back,” it is worth being excited. Just know the benefit is in the components, not the entire building. Curious how this applies to our investment thesis? Let’s talk.

Real estate + proper planning can be a tax holy grail. Let me show you how to use bonus depreciation as a business owner: - Consider this... Standard depreciation schedules range from 27 to 39 years (depending on the type of property). Instead of spreading the deduction, bonus depreciation allows you to get it in one year. Now let’s talk about how we helped a business owner do that this year... - The client is in the 37% tax bracket (makes a few million a year). They bought a building for ~ $3,000,000 in 2025. We coordinated a cost segregation study to analyze the property. This is critical to have a qualified company that stands behind its work. They took into account land value, improvement costs, and depreciable items. The results ~ A depreciation number in the millions. So what does that mean for the client? - The building is part of their operating business. They can use that few million in depreciation to offset income this year. So remember how I said, they will make a few million? Well, they are only going to pay tax on a small % of that. Now everyone wants the tax benefit (shown above), but let me show you the planning... - This is part of a bigger strategy. One that incorporates real estate into their overall investment portfolio. See if they: *Bought this building *Did all this planning work *Then sold it in a few years they would face significant recapture (pay back all those tax benefits). Instead, this building will house their operating company today and be part of their overall real estate portfolio for the future. If they sell, we will consider a 1031 exchange to continue deferring their tax bill. - Our team: Found the cost seg team Walked the property with that team Analyzed & vetted the building purchase Provided all the necessary documentation to their tax team Built out and have started to execute a larger real estate strategy for them My friends, good financial planning is giving you back your time, finding creative solutions, and actually getting those strategies to the finish line.

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.