The 3 Most Powerful Tax Techniques For Investors: Part 1 - Bonus Depreciation

​​L​ast year, we bought a small brand new fourplex in Provo for $550K. Our straight line depreciation deductions amount would have been only $700 because the fourplex was purchased and placed in service in December. After using a few tax saving techniques, we were able to bump it up to $98K just for a less than $3,500 in cost! Here's how we did it.


#1 - 50% Bonus Depreciation For New Buildings

Under the PATH Act, Sec. 168(k) provides a 50% BONUS depreciation deduction in the first year the qualified property is placed in 2015, 2016, or 2017. (thanks to Obama!) The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019.


Related Article: Bonus Depreciation Applies To New Class of Property - The Tax Adviser


Congress passed the Protecting Americans from Tax Hikes Act (PATH Act) in 2015 which includes an extension of bonus depreciation through the end of 2019. Bonus depreciation enables you to deduct a substantial amount of a new long-term asset’s cost (it must be done in a single year).

How does that apply to us investors? It means is that you get 50% Bonus depreciation deduction on a property purchased in 2015 through 2017! Under the PATH Act, bonus depreciation will be in effect through the end of 2019 with a gradual phase-out as follows:

• 50% in 2015 through 2017
• 40% in 2018
• 30% in 2019

With bonus depreciation, a taxpayer can deduct in a single year the allowed percentage of the cost of an item that qualifies for bonus depreciation and is placed in service that year. For example, if a property that costs $550,000 is placed in service in 2016, $275,000 can be deducted the first year through bonus deprecation with the remaining $275,000 deducted using regular depreciation over several years. If the same item is purchased in 2019, only 30% of the cost can be deducted the first year with bonus depreciation.

Property qualifies for bonus depreciation only if:

• it is new (if the newly purchased property contains used parts, it is still treated as new if the cost of the used parts is less than 20% of the total cost of the property)
• it has a useful life of 20 years or less (this includes all types of tangible personal business property and software you buy, but not real property , and
• you purchase it from someone who is unrelated to you (it can’t be a gift or inheritance).

In addition, if the asset is listed property, it must be used more than 50% of the time for business to qualify for bonus depreciation. Listed property consists of automobiles and computers and certain other personal property.


Bonus depreciation was enacted as a temporary measure to help the ailing U.S. economy. It was scheduled to expire at the end of 2008. However, due to the continuing bad economy, it has been continually extended by Congress which enacted annual “tax extender” bills to continue it and certain other popular tax breaks each year. Now, bonus depreciation will be available for all qualifying property through the end of 2019. It will not be available in 2020 or later.


Bonus depreciation is optional—you don’t have to take it if you don’t want to. But if you want to get the largest depreciation deduction you can, you will want to take advantage of this option whenever possible.


Sources:
50% Bonus Depreciation Extended Through 2019 - Nolo.com
Claiming the Special Depreciation Allowance - IRS.gov


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In the next post I will be talking about Cost Segregation Study, which is also another powerful tax saving technique that saved us tons of money on taxes this year.

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Read the next article - Part 2: Cost Segregation