100% Bonus Depreciation Could Return This Year: 2025 Tax Update

Real estateHey everyone, I’m Dave Meyer. Welcome back to On the Market. The Year 2025 is shaping up to be a potential tax game changer for real estate investors. With the potential return of a hundred percent bonus depreciation and a range of new opportunities. Today, we’re breaking down some potential changes to popular tax strategies and the new opportunities that could pass Congress in the coming months. Joining me on today’s episode is Brandon Hall of Hall CPA. He’s a real estate tax expert who’s here to guide us through it all. Stick around because these moves could redefine your investing game this year. Let’s jump in. Brandon, welcome back to On the Market. Thanks for being here.Thanks, Dave. Happy to be here.As our audience must remember, Brandon joins us probably about once a year to talk about taxes, and this is a perfect time of year to just be talking about some of the updates to the tax code that are relevant to real estate investors that we know about. And then the second half of the show, we’ll pull out our crystal balls and talk about some of the things that are being discussed in terms of new policy. And we’d just love your opinions on those, Brandon, because we don’t know exactly how they’ll shape up. But tell us, are there any new changes to the tax codes that have actually been enacted that you think real estate investors should really know about right now?I would say that the big one is just that bonus depreciation continues to phase out. So this year we are 40% bonus depreciation. Next year, 2026 will be 20%, and then 2027 will be 0%. If nothing changes. Now there’s a high expectation that something will change, but as of right now, that’s what we’re looking at. So when the Tax Cuts and Jobs Act was originally implemented back in 2017, 100% bonus depreciation came with it. So if you were buying a rental property and doing a cost segregation study, historically you would get 50% bonus depreciation on various components. But with the 2017 TCJA, you could buy a property, get a cost segregation study performed, and for any component with a useful life of less than 20 years, which typically on cost sick studies is about 25 to 30% of the value of the property. Those components can be 100% written off via bonus depreciation. But that 100% depreciation’s been phasing out. So this year it’s 40%. So the value of the cost eg study is essentially being eroded. But even if bonus depreciation, 0% ever reaches that 0%, it will still be valuable to do a cost EG study. I’ve gotten that question a few times. It’s like, well, it’s always valuable to front load your deductions to create tax deductions for you, tax losses for you so that you can create tax savings, but it’s not as valuable as it would have been if you had a hundred percent bonus depreciation.Okay. And so I’m curious, just in your business then, there’s been a lot of talk of bonuses, depreciation, getting extended in a new potential tax law that comes out with the new Trump administration. Are you seeing people hold off on doing cost eggs or can you use a cost segregation study that is done now for your 2025 taxes regardless of when that law gets passed?So we’re not seeing people really hold off. We are seeing people ask questions, but most of our clients that are doing cost segregation studies right now are doing them for their 2024 acquisitions. So you just have to do a cost study for the property before you file that first tax return, which you could do for a 2024 property all the way up until October 15th, 2025.Wow.Yeah, so you don’t have to do the SIG study in the same year. Now all the SIG firms, and if you’re a Ssec person listening to this, don’t worry, I love cost sick people, but all the SIG people, a lot of the SIG people will really push, get a cost act done immediately, typically in November and December because they have sales targets that they’re trying to achieve. But you don’t just have to do it before you file your first tax return with that property on it. So if you’re purchasing a property in 2025, my recommendation would just be to either go ahead and do the cost ex study if you’re happy with the 40% bonus depreciation. But if you’re not happy with 40%, if it doesn’t give you the return that you’re looking for or the tax savings that you’re looking for, then yeah, hold off and kind of see what comes out a little bit later on this year.One thing I’m always sort of curious about with cost segregation studies is does it make sense for people who don’t have real estate professional status to do this? And maybe you can also explain what real estate professional status is because you’re probably doing a lot better than I can.So does it make sense for people that don’t have real estate professional status? Yes, but every answer it depends. And it really depends on the passive losses that would be created from this CASICK study. When you front load the depreciation, you’re creating a much larger tax write off for yourself, but that tax deduction is going to be considered passive. And so you have to look at do you have passive income to offset the passive losses with, because if you don’t have passive income and you just have all these passive losses that are accruing and you’re not a real estate professional, then the passive losses will just be suspended and carried forward. So you’re not going to be able to utilize them today. And even that’s not the worst case scenario because in my situation, I’ve done a couple cost checks on properties and I’m not a real estate professional. My wife’s not a real estate professional, so we just have suspended passive losses that are accumulating on our tax returns. But now I’m in a pretty nice position where I could sell a couple of my rentals just outright and not have to jump through 10 31 exchange hoops and utilize the passive losses that are sitting on our books.
So it creates some flexibility. It’s not the worst thing. It’s not optimal, but it’s not the worst thing, if that makes sense. So yeah, if you’re not a real estate pro, it’s just a passive loss equation. That’s the game. So if you can create passive income, then you’re set. We have some clients that invest in surgical centers, they’ll invest in venture funds that are buying businesses like a venture fund might give my business some money for a stake in my business and then I’m passing profit back to that venture fund. Well, that’s passive income to anybody that owns a stake in that venture fund. So we have clients that figure out how to create passive income that they then use the rental losses to offset with. And that’s where cost stakes can make a lot of sense, even if you’re not a real estate proJust for everyone. So that the benefit of being a real estate professional is that you get to use those passive losses to offset active income instead of passive income. So for example, if my wife were a real estate professional, I could then take the passive losses from that cost segregation study and apply it to my W to income and reduce my total taxable income, not just my passive income. So that is a really big benefit. And why, depending on your personal situation, you see sometimes a spouse becoming a real estate professional to enjoy some of those additional tax benefits.It’s a huge benefit. If you have a spouse that’s a real estate pro and you’re a high income earner, you file a joint tax return, you’ve got a real estate professional status tax return, and as long as you’re materially participating in your rentals, those rental losses are passive. So now you’re doing a cost segregation study to front load the depreciation. You’re creating large tax losses that you can immediately use to write off against your income, and it creates immediate tax savings for you that you go and reinvest and continue to build your wealth in your portfolio. But if you’re not a real estate pro, those losses remain passive. They become suspended and they sit with your tax return indefinitely so forever, and you can use them at some point, but it’s just not as beneficial as being able to capture the tax benefit today, redeploy the tax savings into more real estate or other assets and continue to grow your wealth.
And I should also say that this is a timing play, right? So we’re talking about front loading depreciation. Eventually we have to pay that back. Whenever we sell the property, we have something called depreciation recapture. So 10, 20, however many years later, you end up selling your assets. You do have to pay depreciation recapture, which is basically all the depreciation you’ve ever claimed up until that point. They can get pretty expensive to sell, which is why people do 10 31 exchanges. And it’s also why they passed down these real estate assets to their heirs because their heirs get a stepped up basis in the property equal to fair market value at the date of death and all that depreciation recapture goes away. So a lot of our clients just continue to roll it into the next property with that eventual intention. And if they ever need cash today, instead of selling the property, they just get a loan on the property, cash it out because loans are not taxable.Wow, that’s a good strategy. I like that.Yeah.Alright, well, so it sounds like depreciation and bonus depreciation, good thing to know, it’s down to 40% this year, but everyone should probably be keeping an eye out on what happens with tax policy over the next couple of months. Before we get into looking towards the future, Brandon, what are some of the other things that strategies that real estate investors should be thinking about going into tax season?The number one strategy that it’s kind of more of like a compliance thing, to be totally honest with you. It’s not really like a strategy that you can actively deploy, if that makes sense. It really just depends on the competency of the professionals that you’re using or your yourself. If you DIY, your tax returns, it’s something called partial asset dispositions. So these, I believe they came about from the 2013 tangible property regulations, but basically the concept is if you replace a component of the property that you own, then you should be able to deduct the cost of the component that you replaced. So for example, if I bought a property, it obviously comes with a roof, that roof has value. Whether or not I do a cost segregation study, it is true that the roof would have some sort of value that could be allocated to it. So if I go and replace the roof with a new roof, then I should be able to identify the cost of the old roof that I ripped out of the property, and I should be deducting that cost. I would say that’s probably the number one thing that is missed on tax returns.Oh, ING okay.Is just not deploying that. Right. So with our clients, we’re always looking at those improvement schedules and we’re scrubbing the balance sheet and trying to figure out what are the costs of the components that we rip out. And frankly, we don’t do a good enough job telling clients that we’re doing that.And should that reduce and a lower tax burden?If you’re deducting that, yeah, you’re able to deduct it immediately. Yeah, it’s going to go right off against any of the income that you’re earning.Okay.Yeah, it’s a great way And you don’t have the depreciation recapture on that later because you ripped it out of your balance sheet.Oh, right.So it’s like a double whammy.So is that something you sort of have to do yourself though? Because I can imagine you’re not getting some tax form from your contractor saying, I ripped out X dollars amount of components. So do you just have to go and do that manually?I mean, it depends, right? If you’re in a roof example or like an HVAC or a water heater type of example, you’re typically getting one invoice
For the replacement roof, the materials, the labor, right? Most people give that invoice to their accountants, and what the accountants need to do is go and say, okay, I have this new roof. Let’s identify the old roof and assign a cost to it and then deduct it from the balance sheet. But most of the time that’s not happening. And the way that you can tell if that’s happening or not, A really simple example is let’s say that you bought a hundred thousand dollars property, $80,000 is allocated to improvements, 20,000 is allocated to land. You did not do a cost egg study. So if you look at your tax returns, there are supporting schedules called the federal Asset Schedule, I think is what it’s called. It’s typically in landscape view. If you’re looking at your PDF form. So if you just scroll all the way down and look for the landscape views, there’s going to be this kind of schedule that says the name of the property, and then it’s going to say, building 27 and a half, it’s going to show you the annual depreciation, and then it’s going to show you the cost assigned to that building. So in this example, it would be $80,000. Now when I replace the roof, typically what happens is you just see another entry on that schedule that says roof 27 and a half years, $10,000. What you also want to see is you want to see the building being decreased from 80,000 to call it 75,000. If $5,000 of cost was assigned to the old roof.
Typically you don’t see that. And so what’s happening in those situations is you now have 10 K of new roof. You also have this $80,000 of building value where the old roof is embedded in. And so now you’re depreciating in effect two roofs, even though you only have one. Got it. Okay. So it’s really inefficient for real estateInvestors. That makes a lot of sense. How if I were to go to my CPA and say, am I doing this? How would you phrase that exact question to make sure I’m asking it right,Man, I’ve thought about this a lot because we see this mistake all the time, and I’ve talked about this a lot. I don’t know. I think the best thing to do is just say, Hey, I have this improvement. Can you make sure that we do partial asset dispositions,Partial asset dispositions?Okay. I think that’s the best thing to do, and put it in writing and an email partial asset dispositions. Can we make sure we do that? Just get ’em to give you a reply one way or the other.I’m writing that one down. Everyone write that one down right now. Partial asset dispositions. That’s going to be helpful this yearAnd there’s some nuances to it, so you might not actually be able to do it all the time, but that is the number one mistake that we see, not people not doing.We’ve covered a lot already and there is plenty more to discuss. But before we head to break, I wanted to mention BiggerPockets brand new Tax and Financial Services Finder. If you’re eager to get started in real estate investing, a smart first step is to partner with an investor friendly financial planner who could help you get your house in order and ensure you’re set up for financial success from the get-go. Go to biggerpockets.com/tax pros to get matched with a tax professional and financial planner in your area. We’ll be right back. Welcome back to On The Market. I’m Dave Meyer here with Brandon Hall, and we’ve got more insights to share on 2020 five’s tax strategies. We just heard about what Brandon thinks you should be paying attention to for your taxes filing for 2024. But in the news, there has been a lot of talk and discussion of potential tax changes, extensions of tax cuts from 2017. So Brandon, maybe you could just start by telling us what are the big ticket things you think are being discussed and which ones are the most interesting and relevant to real estate investors?So the biggest ticket items are just extending the 2017 tax Cut and Jobs act as is. So the house passed their budget framework. Now, a lot of people got this confused with like, oh, these are the actual tax proposals. We actually haven’t seen any actual tax proposals yet. So I just want to make that really clear. For anybody that’s listening and potentially seeing bad advice online, we don’t know what’s included yet. What we do know is that the house passed a budget framework, which basically says we want to approve this certain amount of spending to use in these various areas, and the amount that they approved would cover the entire 2017 tax cuts and Jobs Act being extended. So what was in the 2017 Tax Cuts and Jobs Act? Well, you had a hundred percent bonus depreciation. For anybody that’s developing software or tools or anything like that, you had a hundred percent expensing of RD costs.
You have the salt cap limits. That was the $10,000 itemized deduction issue that really hosed a lot of people living in high income tax states or high property tax states. You can no longer deduct all the property taxes or the state income taxes. They were capped at 10 K. That would potentially be included in this bill if it were to eventually pass, is maintaining that $10,000 cap. You also have the 20% QBI deduction that pass through deduction. And then there’s a couple things like the standard deduction is I think is a $12,000 base, I think is what it is, adjusted for inflation, that would be halved. If that’s not extended, then you’d have personal exemptions come back into play. So there’s a lot of things from the 2017 Tax Cuts and Jobs Act that would be interesting to go back and look through if you’re curious about what could potentially be extended. But essentially it’s almost like a no change, if that makes sense.Right? Yeah. It’s like we’re just not going back to 2016 essentially.Yeah, exactly. Exactly. If that doesn’t happen, then starting January 1st, 2026, a lot of this stuff is being reverted. One of the big ones is the estate tax. That exemption is I believe roughly 13 million per person right now. And that would be reverted back to what it was pre 2017, which is half of that. So if you’re dying in 2026 or beyond, it’s not going to be good for you orFor your heirs. For your heirs.Yeah. Why would you care?Okay. But it seems like with a Republican controlled Congress, it feels to me like it’s almost certainly going to get extended.They have to do this through the budget reconciliation process. So the challenge is that the budget has to balance in a 10 year window, typically speaking, in order to do this with the budget reconciliation process. Now, why would we do it through the budget reconciliation process? Because you just need a simple majority to pass policy through the budget reconciliation process. So the house and the Senate is Republican controlled. Thus we want to do it that way. We don’t want to have to have a super majority or anything like that in order to pass policy because then the Democrats will stall, right? Or they’ll push it away, they won’t sign on. So that’s the key. The problem though is balancing that budget over a 10 year horizon, extending the TCJA, I believe the tax foundation estimates that it’s going to cost even after GDP add-backs roughly 3.8 trillion over the 10 year horizon. So they’re going to be fighting that. How do you balance that? And that’s where we get some of the tariff talk. I believe that’s coming into playThat tariffs would generate enough revenue to offset that.Yeah, in theory. And then it’s like are you allowed to include that in the markups and the balancing? So it’s just a lot of back and forth on it. Yeah.Okay. So there’s a lot of gamesmanship and procedural congressional questions that are still have to be answered.Yes. But I think that we’ll have a lot of clarity here. Probably within the next two to three weeks, at least the spirit of the bill, we will understand probably the next two to three weeks.And what about any potential further changes or policies that will affect the tax code? I’ve heard about tips not being taxable. I’ve heard tax exemptions or deductions for veterans. Those are interesting in their own right. But are there any potential, anything that’s being discussed that might pertain to real estate investors particularly?So, so far, the ones that seem to be gaining steam are no tax on tips, no tax on overtime, and no tax on social security payments. So those are the three big ones. And then obviously this universal tariff baseline of driving some amount of revenue, having our foreign countries pay for our needs type of deal. I think those are the big ones that we’re seeing. But again, the problem is going back to balancing the budget over a 10 year window because you have to do that in order to use the budget reconciliation process as it stands today. So how do you extend the TCJA as it was and also add on these additional campaign promises that were made? I think it’s going to be really challenging and it’s going to be a really interesting back and forth that we’re going to witness here over the coming months.Don’t go anywhere. There’s still a lot to unpack. We’ll be back after a quick break. Welcome back to on the market. Let’s jump back in. Obviously all of these changes will impact you on a personal level probably, or on your ordinary income tax or if you’re a tipped worker or receiving social security or overtime obviously. But it sounds like for real estate investors, bonus depreciation is the big one.I would say bonus depreciation is the big, I do think that 20% qualified business income deductions good.
But I would also say something that has really flown under the radar is opportunity funds, qualified opportunity funds. I don’t know what it would look like to extend that or bring it back or anything like that. And you could still invest in qualified opportunity funds today, so they haven’t gone away. But back when the 2017 TCJA was launched, you could essentially move money, move gains out of equities, for example, put them into real estate and delay, defer the taxation on those gains for, I believe it was like seven years. And by the time that that seven years came around, you only had to pay tax on 85% of the
Gains.
So you got this sweet tax break by moving money out of equities and into real estate that was in qualified opportunities zones, basically like lower income areas, areas that they wanted to gentrify and build up. So it’d be interesting to see if any of that comes back into play with new timing requirements. You can’t get that 15% discount anymore, but a qualified opportunity funds are phenomenal. Even still today, if you have a 10 year time horizon, they can be really, really great for you if you’re strategic about setting up a qualified opportunity fund or investing in a qualified opportunity fund because there are still great tax savings if you hold for at least 10 years. But that’ll be an interesting one to see if it comes back. I think you’ll have a lot more education and focus on that because people are now educated on how it actually works. And so if it does come back, I think it would just be interesting to watch unfold.Yeah, probably get started up quicker. There’ll probably be more players because last time around it felt like people didn’t really get it for a few years and the clock was already ticking unless you got into it in the first couple of years after it was passed, you sort of missed out on the best benefit and then if you waited a little longer, you missed out on the second best benefit. And that third benefit I think is still around, but it’s just not as appealing. I think that would be super interesting if that happens again. So that’s definitely something we’ll keep an eye out as well.Yeah, and the problem too is it was so technical that a lot of accountants didn’t even know where to start with advising their clients on it. So they just didn’t. So they just wasn’t like something that you would include in a normal, Hey, you should do this thing to mitigate your taxes type of planning. And I think if it came back, you would see a lot more of that.Alright, well thank you so much Brandon for your insights on the tax code. Is there anything else you think our audience should know before we get out of here?Don’t hold me to this, but I’ve got my money on. If 100% bonus depreciation does come back, it’ll be as of January 1st, 2025.Agreed.So we’ll see. But I was talking with our national head of tax the other day about this too, because we were kind of trying to guesstimate do we think it’s going to be retroactive to January this year? But his point was like, well back in 2017 when the TCJA was implemented, it was after, I believe September 27th and beyond. If you bought a property September 27th and beyond that, if you closed on September 26th, no, a hundred percent bonus depreciation for you. Wow. But I’ve got my money on January 1st, so we’llSee. Okay. I was kind of assuming it would go retroactive. I don’t know why. It just seemed like the logical thing to do to just make it available for the whole tax year. But I guess we’ll have to wait and see. But not being nearly as informed as you are, my money’s with you. Alright, well Brandon, thank you so much for joining us. We appreciate it.Thanks Dave. I appreciate it.Alright, that is all for today’s episode of On the Market. Whether you are optimizing your rental losses, leveraging cost s, or navigating new federal guidelines, solid tax planning can make a world of difference for real estate investors. So I want to thank Brandon Hall for sharing this valuable insight and information with us. If you want to connect with him, we will put a link to his website in the show notes. And if this conversation helped you gain clarity for your 2024 tax strategy, be sure to spread the word on this episode. I’m Dave Meyer, thanks for tuning in and we’ll see you next time.