While 100% bonus depreciation was a significant advantage for multifamily investors in the past, it's important to understand that it is currently being phased out. In 2025, the bonus depreciation rate is 40%. However, it can still be a valuable tool for investors. Here's how it works and why it's beneficial:
How Bonus Depreciation Works
- Accelerated Deduction: Bonus depreciation allows investors to deduct a significant portion of the cost of eligible assets in the year they are placed in service, rather than depreciating them over their useful life.
- Eligible Assets: In the context of multifamily properties, this typically includes personal property like appliances, furniture, and certain land improvements. It does not apply to the building structure itself.
- Reduced Taxable Income: By taking this large upfront deduction, investors can significantly reduce their taxable income in the current year.
Benefits for Multifamily Investors
- Increased Cash Flow: The reduced tax burden can lead to increased cash flow, which can be reinvested in the property or used for other purposes.
- Improved Return on Investment: By reducing tax liabilities, investors can potentially increase their overall return on investment.
- Tax Deferral: Bonus depreciation can defer taxes to a later date, allowing investors to use the money now and potentially pay taxes when they are in a lower tax bracket or when the property is sold.
Important Considerations
- Phase-out: As mentioned, the 100% bonus depreciation rate has been phased out. In 2025, it's at 40%, and it will continue to decrease until it reaches 0% in 2027.
- Cost Segregation: To maximize the benefits of bonus depreciation, investors often use cost segregation studies.
These studies identify and classify the various components of a property, allowing investors to take advantage of shorter depreciation periods for eligible assets. - Recapture: When a property is sold, there may be a "recapture" of some of the depreciation deductions, which could result in taxes being owed.
In Conclusion
While 100% bonus depreciation is no longer available, the current 40% rate can still provide significant tax benefits for multifamily investors. By understanding how it works and utilizing strategies like cost segregation, investors can reduce their tax burden, increase cash flow, and potentially improve their overall return on investment.
