EPISODE 4: How Bonus Depreciation Can Slash Your Tax Bill

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create true financial freedom through passive commercial real estate investing. I'm Wayne Courageous III, founding and managing principal of Crei Partners, a leading commercial real estate company, I created CreiCollen, an AI powered resource to serve as your investor education guide. Built on the insights and experience we've developed at CREI Partners, Creicollen is here to educate you through passive invest tax strategy topics to help your journey in passive investing. Just a quick disclaimer. This podcast and CRA Colin is for educational purposes only and is not legal tax or investment advice. Always consult with your attorney, CPA and financial advisor before making any investment decisions. I've spent nearly two decades helping investors understand the power of commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, simple to follow and and packed with insights to help you grow your income and protect your capital without becoming a landlord. If you're ready to learn quickly and invest smarter, you're in the right place. Welcome to Building Passive Income. Let's build wealth together. Here's creicollen.

Hey there, I'm Crei Colin and welcome back to Building Passive Income. Over the last few episodes we've talked about setting goals, defining your investment criteria, and conducting due diligence on sponsors. Today we're going to talk about one of the most critical topics for high income earners, how to use real estate syndications to reduce your tax bill. If you're a W2 employee, business owner, or high income professional earning $250,000 or more per year, you're probably paying a significant amount in taxes and you're probably wondering, is there a legal way to reduce my tax burden without taking on huge risks or becoming a full time real estate investor? The answer is yes, and today I'm going to show you how. We'll talk about how real estate depreciation works, how passive losses can offset your passive income, the difference between real losses and paper losses, key strategies like cost segregation and bonus depreciation, and most importantly, how to work with your CPA to build a tax efficient investment strategy. By the end of this episode, you'll understand how to use real estate as a powerful tax tool. Let me tell you about Sarah. Sarah is a physician earning $500,000 per year. Last year she paid about $150,000 in federal and state taxes. She was frustrated. She felt like she was working incredibly hard, but a huge chunk of her income was going to taxes. Sarah heard about real estate investing as a tax strategy, but she didn't have time to become a landlord. She didn't want to deal with tenants, toilets, and trash. So she started learning about passive real estate syndications. Over the course of one year, Sarah invested $300,000 into three multi family syndications. Here's what happened. Investment 1 $100,000 in a Dallas multifamily deal first year depreciation $40,000 Investment $100,000 in a Phoenix self storage deal first year depreciation $35,000 Investment 3 $100,000 in an Atlanta multifamily deal first year depreciation $45,000 Total first year depreciation $120,000 now here's the key. Sarah didn't lose $120,000. That depreciation is a paper loss, not a real loss. Her investments are performing well. She's receiving cash distributions. But on paper, for tax purposes, she has $120,000 in passive losses. Those passive losses can't offset her W2 income directly because she's not a real estate professional. But here's what they can do. They offset passive income. If Sarah sells a business investment property or has other passive income in the future, those losses will offset that income they carry forward indefinitely. Sarah is building a passive loss carryforward that will shelter future passive income for years to come. Over the next 10 years, Sarah continues investing. She builds a passive loss carryforward of over $500,000. Then in year 10, she sells a rental property and realizes a $400,000 capital gain. Normally, she'd owe about $120,000 in taxes on that gain. But because of her passive loss carryforward, she offsets the entire gain. She pays zero taxes on the sale. That's the power of strategic tax planning with real estate. Now let's break down exactly how this works. The Foundation Real Estate Depreciation depreciation is the IRS's way of acknowledging that buildings wear out over time. Here's how it when you own real estate, the IRS allows you to deduct a portion of the property's value each year as a depreciation expense. For residential real estate, the standard depreciation period is 27.5 years. For commercial real estate, it's 39 years. This means that if you own a $10 million apartment building, you can deduct roughly $360,000 per year in depreciation. Even if the property is actually appreciating in value. That's a paper loss. You didn't actually lose money. But for tax purposes, you get to deduct it. And here's the kicker. When you invest in a real estate syndication, you get to claim your share of the property's depreciation even though you're a passive investor. Cost Segregation Accelerating Depreciation Standard depreciation spreads the deduction over 27.5 or 39 years. But there's a strategy to accelerate that depreciation into the first few years of ownership. It's called cost segregation. Here's how it A cost segregation study identifies components of the property that can be depreciated over shorter periods. Instead of depreciating the entire building over 27.5 years, you break it into 5 year carpets, appliances, fixtures 15 year property landscaping, parking lots fencing 27.5 year property the structure itself. By reclassifying components into shorter depreciation schedules, you can accelerate a huge portion of the depreciation into the first few years. A $10 million property might generate $360,000 per year in standard depreciation. With cost segregation, you might generate 1.5 million to $2 million in first year depreciation. That's a massive tax benefit. Bonus depreciation the turbo boost Cost segregation becomes even more powerful when combined with bonus depreciation. Bonus depreciation allows you to deduct 100% of the cost of certain property components in the first year. Important note bonus depreciation is being phased out 2023 80% bonus depreciation 2024 60% bonus depreciation 2025 40% bonus depreciation 2026 20% bonus depreciation 2027 and beyond 0% bonus depreciation unless Congress extends it. This means the window for maximum tax benefits is closing. If you're planning to invest for tax purposes, sooner is better than later. Real losses versus Paper losses Understanding the Difference Here's a critical point that confuses many investors. Depreciation is a paper loss, not a real loss. Let me explain. Paper loss A tax deduction that reduces your taxable income but doesn't mean you actually lost money. Real loss. You actually lost capital. The investment underperformed or failed. You invest $100,000 in a syndication. The property generates $7,000 in cash distributions. You receive a check for $7,000. The property also generates $40,000 in depreciation from cost segregation on your tax return. You income $7,000 depreciation $40,000 net loss $33,000 but you didn't lose $33,000. You made $7,000 in cash the $33,000 loss is a paper loss. For tax purposes, that paper loss becomes a passive loss carryforward which you can use to offset future passive income. This is how you build tax efficient wealth. Passive Activity Loss Rules the key limitation here's the catch. If you're a W2 employee or business owner who is not a real estate professional, your passive losses from syndications cannot directly offset your W2 or active business income. This is due to the IRS's passive activity loss rules. Passive Income Income from investments where you don't materially participate like syndications Dividends Capital gains Active W2 wages Self employment income Active business Income the rule Passive losses can only offset passive income. They cannot offset active income unless you qualify as a real estate professional. So what does that mean for you? If you're a high income W2 employee, your syndication losses will not reduce your current year W2 tax bill, but they will carry forward and offset future passive income. When you sell a property business or receive other passive income, those losses will shelter that income. If you're a real estate professional, you can use passive losses to offset your active income. But qualifying as a real estate professional is difficult and requires spending 750 hours per year in real estate activities. For most high income professionals, building passive loss carryforwards is the strategy. Real Estate Professional Is it worth it? Let's quickly talk about real estate professional status or reps. If you qualify as a reps, you can use passive losses from real estate to offset your W2 or active business income. To qualify, you spend more than 750 hours per year in real estate activities. Spend more than 50% of your working time in real estate activities. Materially participate in your real estate investments. For most W2 employees and busy professionals, this is extremely difficult to achieve. However, if you have a spouse who doesn't work full time, they may be able to qualify as a reps, allowing your household to use passive losses to offset active income. This is a complex strategy. Work with a qualified CPA who specializes in real estate taxation. How to Use Syndications for Tax Planning the Strategy here's the step by step strategy for high income earners. Step 1 Assess your tax situation Work with your CPA to understand your current tax liability, your projected income and tax bill for the year. Potential future Passive income Sources Business Sale Property sale Other Investments Invest in syndications Strategically invest in high quality syndications that utilize cost segregation. Studies focus on deals that generate significant first year depreciation. Diversify across sponsors, markets and asset classes. Don't invest solely for tax benefits. Invest in quality deals that also provide strong returns. Build your passive loss carryforward each year, your syndication investments will generate passive losses. Those losses carry forward indefinitely. Over time, you'll build a large passive loss carryforward. Step 4 Use your losses strategically when you have a passive income event Sale of a business sale of investment property large capital gain. Your passive loss carryforward will offset that income. This allows you to realize gains without paying taxes. Review and adjust annually. Work with your CPA every year. Review your passive loss carryforward Plan for upcoming passive income events. Adjust your investment strategy as needed. Important tax strategies to discuss with your cpa Here are additional strategies to explore. Timing your investments if you know you'll have a large passive income event next year. Business sale Property sale Consider making syndication investments this year to build passive losses that will offset next year's income. Using syndications to offset other passive income if you own rental properties and are selling one, the capital gain is passive income. Your syndication losses can offset that gain. Strategy 3 Oil and gas investments for active income offsets if you're a high income W2 employee and you want to offset your active income now, consider combining real estate syndications with oil and gas investments. Oil and gas offers intangible drilling costs or IDCs which can offset active income in the first year. This is a more aggressive strategy with higher risk. We'll cover this in a future episode. Planning for depreciation recapture When a syndication property is sold, depreciation recapture rules apply. You'll owe taxes on the depreciation you claimed, but you can offset that recapture with other passive losses or defer it using a 1031 exchange at the syndication level. Work with your CPA to plan for this. Common mistakes to avoid mistake number one Investing solely for tax benefits. Never invest in a bad deal just for the tax write off. Always prioritize fundamentals. Strong market, strong sponsor, strong business plan. Tax benefits are the cherry on top, not the reason to invest. Not working with a qualified cpa Real estate taxation is complex. You need a CPA who specializes in real estate and syndications. A generalist CPA may not understand passive activity loss rules, cost segregation, or depreciation strategies. Mistake number three expecting immediate W2 tax savings. If you're a W2 employee, syndication losses will not reduce your current year tax bill unless you qualify as a reps. Set realistic expectations. Not tracking your passive loss carryforward. You need to track your passive losses every year. Your CPA should provide you with a summary of your carryforward. This is critical for future Tax Planning the Bottom Line Real estate syndications are one of the most powerful tax tools available to high income earners. By investing strategically in deals that utilize cost segregation and bonus depreciation, you generate significant passive losses. Build a passive loss carryforward Offset future passive income like business sales or property sales. Build tax efficient wealth over time. But remember, tax benefits should never be the only reason you invest. Always invest in high quality deals with strong fundamentals. Work with a qualified CPA who understands real estate. Taxation. Plan proactively, not reactively. Here's what I want you to do this Step one Schedule a meeting with your cpa. Discuss your current tax situation and passive loss strategy. Step 2 Ask your CPA do I have a passive loss carryforward? If so, how much? What's my projected tax liability for this year? Could real estate syndications help me build tax efficient wealth? If you're ready to invest, focus on syndications that use cost segregation studies Generate significant first year depreciation. Are led by experienced sponsors. Provide strong fundamentals and returns. Track your passive losses every year. That's it. Be proactive. Be strategic. If you want help building a tax efficient investment strategy, join our free Passive Investor coaching program@ passiveinvestorcoaching.com we'll help you understand how to invest strategically for both returns and tax benefits. You you can also visit Creipartners.com or email us@investreipartners.com Remember, taxes are your largest expense, but with the right strategy, you can legally reduce your tax burden and build generational wealth. Let's Build wealth together.

Thanks for tuning in to Building Passive Income. Today's episode helped shift your mindset or gave you a new tool to grow your wealth. Do us a favor and like subscribe and share this podcast with someone you care about. Want to go deeper? Join our free Passive Investor coaching program@ passiveinvestorcoaching.com it's the perfect next step to start building wealth through commercial real estate the right way. Remember, financial freedom isn't a dream, it's a decision. And it starts with building passive income. We'll see you in the next episode. Sam.