Gain Deferrals in Real Estate Investing through Bonus Depreciation
By Walter M. McGrail, Cendrowski Corporate Advisors LLC
Most taxpayers have heard of likekind exchanges and opportunity zone investments to defer gains from sales of real estate used in a trade-orbusiness and other capital assets. Each of these deferral techniques can involve very tedious qualification that may make deferral impractical. However, there is another technique for deferring gains by investing in the proceeds of their capital transaction in depreciable real estate: bonus depreciation.
Bonus depreciation allows taxpayers to deduct 100% of the cost of qualifying property for federal income taxes and significant amounts of qualifying bonus depreciation property can be identified in the acquisition of real estate through a properly conducted cost segregation study. A cost segregation study involves componentising between costs attributable to the building which are depreciable over longer periods (27.5 to 40 years) and the shorter life components which qualify for bonus depreciation. Bonus depreciation can be claimed on qualified costs identified in a newly constructed building or costs incurred to acquire an interest in an existing real property.
There are several ways to reinvest capital gains proceeds into interests in depreciable real estate either by acquiring interests directly in real property for use in a trade-orbusiness or rental activity or through the acquisition of indirect interests in real property such as acquiring interests in a partnership or limited liability company that owns real property used in a trade-or-business.
As part of the solution for reinvesting capital gains in qualifying bonus depreciation property, taxpayers must navigate complex rules involving possible limitations on interest expense from indebtedness used to acquire interests in real estate. With the proper know-how, properly structured reinvestment of capital gains proceeds into real property can be accomplished without the rigorous challenges by investment in either likekind or opportunity zone properties.
Walter M. McGrailGGI member firm
Cendrowski Corporate Advisors LLC
Tax, Consulting, Accounting Services
Detroit (MI), USA
T: +1 248 540 5760
Located in Bloomfield Hills, Michigan and Chicago, Illinois Cendrowski Corporate Advisors provide specialised professional services to clients internationally. With expertise in tax planning and family office advisory services, they also specialise in business valuation, risk management, dispute advisory including economic damages analyses, fraud investigations, and forensic accounting services.
Walter M. McGrail, JD, is the managing director of CCA’s tax practice. Walt participated in the development of the UPREIT technique and has extensive expertise in the taxation and operation of real estate properties. Walt has conducted numerous cost segregation studies for real estate used in most real estate trades-or-businesses including retail, office, multifamily, industrial, and hospitality.
Published: Real Estate Newsletter, No. 11, Spring 2020 l Photo: f11photo - stock.adobe.com