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How to Maximize Your Tax Savings: When is Bonus Depreciation Phasing Out?

Bonus Depreciation in Real Estate Investing: 2022 is the Last Year at 100%

The U.S. tax code includes all sorts of measures for reducing your tax bill. One of the primary methods for investors to reduce their tax liability is depreciation. And 2022 is the last opportunity to maximize savings related to depreciation, thanks to the phase out that was implemented as part of federal legislation passed in 2017.

Continue reading to learn more about this opportunity to maximize your depreciation-related tax savings, as well as how this relates to real estate investing and syndications.

Bonus Depreciation in the 2017 Tax Cuts and Jobs Acts

Bonus depreciation was first made available through 2002’s Job Creation and Worker Assistance Act. At that time, the law allowed taxpayers to deduct 30% of the cost of purchasing what’s called a “qualifying property” with a 20-year recovery period.

In 2017, the Tax Cuts and Jobs Act took it a step further, increasing the deductible amount to 100% for a set period of time. That set period of time is soon to expire. 2022 is the final year when taxpayers are allowed to deduct 100% of the cost of a qualifying property. There will then be a phase out period wherein the percentage drops year by year, reducing down to 0% by 2027.

Bonus Depreciation Phase out Pyramid - 2022 through 2026
Bonus Depreciation Phase Out Pyramid

It’s certainly possible that new legislation allows for bonus depreciation deductions in 2027 and beyond. But it’s impossible to predict what will happen at that point, and there are currently no plans for the reintroduction of bonus depreciation.

What are Qualifying Properties?

To be eligible for bonus depreciation, an investment must be a qualified property, which can include a number of different types of assets. All qualified properties meet three criteria:

  1. The property must have a determinable useful life of more than one year but less than 20 years.

  2. The investment must be owned rather than rented by the taxpayer.

  3. The property must be used for investment or business purposes.

In most cases, the commercial properties that real estate syndications invest in are also considered qualifying properties. As the owner of a portion of these passive investments, limited partners also enjoy a portion of the tax benefits — like bonus depreciation.

Act Now to Maximize Your Tax Savings

On Jan. 1, 2023, the percentage of bonus depreciation drops from 100% to 80%. Now is the most tax advantageous time to passively invest with a real estate syndication, and the benefits will slowly phase out through 2027.

At Madison Investing, we connect those interested in passive investing with syndication deals that offer the possibility of regular cash flow and strong returns (in addition to the tax benefits). You can learn the ins and outs of real estate syndication by taking our free course: Blueprint for Passive Real Estate Investing.

If you’re interested in discussing your investment goals and whether passive real estate investing is the right vehicle for you , get in touch with us.



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