Can you take 100% bonus depreciation on parts of your property? What is the difference between accelerated depreciation and bonus depreciation? What are some other things you may not know that depreciate even more in real estate? Tom Brodie from CSSI shares his insights.
Tell us a little bit about yourself.
I work with a company called Cost Segregation Services. We help commercial building owners improve their cash flow by increasing the amount of depreciation expense they record, thereby reducing the income taxes they owe. This is a significant benefit that many building owners are unaware of.
There have been some updates this year with the Big Beautiful Bill. Let’s start with Section 1709.
The biggest one, as far as the Big Beautiful Bill, is a 100% bonus depreciation, which means anything less than a 20-year asset can be written off 100% of its value right now. That was in place from 2017 to the end of 2022, and it started dropping by 20% a year. This bill brought that back. The current tax law was going to phase it out by 2026. It was 20% starting after 2022. It was 100% in the drop, 20% a year, which was going to be gone. They brought that back with the bill, which is significant.
The other thing is that Section 179 was an energy-efficiency tax deduction. You give some, and you take some. By bringing back the 100% bonus, they’re going to phase out Section 1709(d) in 2026, where this is really beneficial. If someone built a larger building, for example, 40,000 square feet, there is a dollar value per square foot that you can claim as a deduction if your building is more energy-efficient than the building standard from 2007. Anything built in the last 5 to 6 years, or even maybe longer, is going to be more energy-efficient than something from 2007. That is all found money because all you have to do is engage us to have a study done, and we can get you a deduction.
For example, we conducted a study on a three-story medical office building. The owner received a deduction of a quarter of a million dollars that he didn’t even know he had. We conducted a cost segregation study of his building and found a $3 million deduction. This is going to be on top of that, so he’s going to be able to do it over two different years. Many people don’t know about Section 1709(d) because it involves energy efficiency. But you have to realize that it’s not that you put in something over and above a typical energy-efficient building. You simply follow the building standards, which have evolved and improved significantly from what they were. You qualified for this deduction without doing anything special.
The technology has become so good that it’s already energy-efficient, and you’re getting an amazing depreciation because you’re using what the current technology offers.
A current building standard is much better than it was in 2007 when this law was written. Bonus depreciation is a great benefit. This isn’t used much, so they’re going to phase it out. But if you built a building, as long as you started construction before June 30, 2026, you can still apply for this section 1709(d). But after that, that’ll be gone.
That’s the standard—end of story. That’s what everyone is using, so you shouldn’t really be getting a benefit from it.
It was intended to encourage more energy-efficient building and construction standards. But the reality is, everybody’s already doing that. It’s just one of those government programs. They set them up as incentives, and if no one takes advantage of them, they discontinue them. This is one of those that is going away. One of the things we say is to use all the tax advantages while they’re still out there.
In your world, we heard about bonus depreciation and accelerated depreciation. Are they the same thing, or should we clarify?
Accelerated depreciation differs from what most CPAs do today. Typically, they depreciate a building over its full economic life. For example, the economic life of an office building is 39 years. With accelerated depreciation, we break the building down into its realistic economic life. That can be 5, 7, or 15 years, while the structure itself is 39 years old. When you break it down into those component pieces, you’re accelerating the depreciation, which is a misnomer. In my world, you’re actually depreciating it correctly. If you’re depreciating something over 39 years, it’s not going to last only five years. That’s wrong. The IRS has accepted this method. To differentiate it from what’s happening now, and what most CPAs do, they call it accelerated.
What bonus depreciation does is it takes the 5, 7, and 15 years and says: if you’re eligible for 100% bonus, you can write off the total cost of those assets right now. That’s what 100% bonus depreciation is. It’s looking at everything that’s not structural and writing that off.
Cost segregation is the study that breaks down a building’s assets into their component parts. Once the assets are broken down, you can apply bonus depreciation or use accelerated depreciation based on the economic life units.
Even if someone owns a building for years and they haven’t heard a bonus before or claimed it, it’s not too late. You can go back through what’s called a look-back study. For example, if you bought a building in 2020—when 100% bonus depreciation was enabled—we can do a study and look at what you should have been claiming as a deduction versus what you’ve already claimed. The difference can be applied in the current tax year without amending previous returns. This is great because many people think they missed the opportunity since they didn’t claim it in that tax year. The IRS will let you file what’s called a change of accounting form, which states, “I was using straight-line depreciation; now I’m doing accelerated depreciation.” You can do it in the current tax year, so you’re whole as far as depreciation expense without having to amend the return because no one likes to amend a return.
I also want to clarify that if you’re a passive investor, this may or may not apply to the income that you earn from the property. You cannot apply this depreciation against your own income because you’re not a full-time investor. However, can you apply that to the property’s income that you’re generating from your own investment?
Yes, you can if you have passive investments. Let’s say you’ve got five passive properties. If you do a cost segregation study on one of them, the savings from that one will offset all of your passive income from all your properties. That’s a great way to do it. You don’t have to do a study on every property. You could do maybe one a year to help tamp down your income so you’re not paying as much income tax.
Let’s move on to cost segregation. We’ve covered a bit on it, but let’s dive into that.
This is something many people misunderstand because nobody’s told them about it. One of the things we found at CSSI is that around 10% of building owners have heard of it, and a smaller percentage actually do it. This is where the look-back studies are critical. If we find someone who’s owned commercial properties and has never heard about this, we can go back and make them whole and play catch-up. This applies to any commercial property, whether it’s an office building, a car wash, a rental house, or an Airbnb. Those are all commercial properties, and they’re going to be depreciating. So, we can go back and apply the cost segregation study to one of those properties.
If you’re in the real estate business, and that’s all you do, you need to get that real estate professional tax designation. Once you’ve done that, you have all these passive income sources. Now that you’re the real estate tax professional, those income sources become active. And that’s great because if you have many passive investments. If real estate is not your main activity, you’re limited on how much you can take as a deduction or a loss on those passive investments. A cost segregation study may not help you as much in that situation. If your income is high enough, for example, $150,000 a year, you’re limited in how much you can take in a depreciation deduction.
But you’re not limited if you’re a real estate professional. That doesn’t mean you’re a realtor necessarily. It just means you are involved in the day-to-day activities of real estate, whether you’re managing properties or buying and selling. But there are some strict regulations you have to qualify for, and you have to be able to document 750 hours of your year as a real estate professional. If you’ve got a W-2 job doing something else, you’re not going to be able to document 750 hours.
And I also heard a tip before: if you are married and your wife doesn’t work, that could be a profession she takes up.
Absolutely, especially if you’re filing jointly, then her deductions could offset all of the income. If it’s active for her, it’s active for the household. And I’ve seen it go other ways, too, if the husband is the one who wants to do this.
Let’s go into the green zip drywall tape. I’m super curious about that one.
This is something we’re really excited about. A green mesh tape is a type of drywall tape that can be removed. You apply it like regular drywall tape, then mud over it and paint it. The great thing is that if you ever need to remove the drywall, you can take off the baseboard, grab the bottom of the tape, and pull it up. Because it’s a nylon mesh, you can pull it up to expose the screws, then unscrew the drywall and take it down as one piece.
The fact that you can remove it so easily makes it a reusable asset. The IRS recognizes this as a five-year asset. Since it’s a five-year asset, everything connected to that wall can now be classified as a five-year asset. This makes a cost segregation study much more potent because what used to be like a 39-year wall is now a five-year wall, which increases the amount you can write off. And a lot of times, it’s 30% of construction costs that we can uncover using the drywall tape.
This is going to look very similar to other drywall. We license this tape with the manufacturer in Texas, not too far from me, just north of Houston. The man who developed it was an engineer and architect. It’s been around for about 20 years, but it hasn’t gotten much traction. So, we’re trying to get this out there as a cost segregation company. And this is for larger buildings, with a minimum of $7 to $10 million. If you’ve got a decent-sized building that you’re going to build with a lot of internal walls, this is something you want to pursue.
We do have a self-storage facility that we’ll be building out. It sounds like we’re going to need to use this drywall tape.
Absolutely, it’s one of the things we need to talk about because we can do an estimate. If you look at your building plans and decide that this is going to be worthwhile for you, even if you’re not planning to reconfigure the walls, it does not matter. You’re still eligible for the tax deduction.
Is there any type of construction in real estate where this drywall cannot be used, or is it universally applicable? A poor fit for it might be a flex building with a metal building, without many internal walls, like the office warehouse. It depends on the self-storage units, too. If you have a lot of drywall separating them, it could be very useful. But some self-storage units have metal walls, which probably wouldn’t be good.
A great application is in hotels, apartment complexes, or office buildings. If you have to reconfigure that space, you can do so during the day, because if you’re demolishing walls, you’re not knocking out drywall with sledgehammers. You’re going to take it down, and you’re not going to make a lot of noise. Instead, it’s something that can be done during the day because you’re not disrupting everybody else, and you’re not creating a lot of dust. That’s another great benefit of using this green zip tape.
What I’m learning from this conversation is that we need to get in touch with you before even building a property.
Absolutely. We can’t do the study until the property is built. But we can give you a preliminary estimate of what we think you could save and even make some suggestions, especially if you’re doing renovations. Timing really depends on what kind of tax benefit you need. If you’re buying a building and doing renovations, we might recommend buying it and operating it for several months first, then doing the renovations next year. That way, you can spread out the tax benefit from the purchase over one year, and then apply the renovations you apply to the next tax year, and lower your tax basis as you go.
Do you even have suggestions for if you’re building something specific, this is what you should be thinking about?
Definitely, we can do that. If you’ve got an idea of what you’re building, a budget, and maybe some preliminary drawings, especially if you’re doing green zip, we do the drawings because it’s based on the square footage of the drywall. We need to know the size for cost segregation, especially if someone’s getting into purchasing a building. We could do a preliminary estimate for a couple of buildings if they have several buildings they’re thinking about, and then we can say which one will give you the biggest income tax deduction. That may not be the only deciding factor, but it may help you make decisions. All things being equal, you may choose the project that offers the greatest benefit.
Do you do this all across the country?
I’m based just north of Houston, Texas, but I can work anywhere in the country because much of it is done remotely. We send someone out to take pictures, but if a building’s not in my area, we have a contract with a national collateral photographer company that will send someone out. They’ll take the pictures for us because that’s part of our documentation to prove that someone was there. We want to know what this building looks like.
Another thing I wanted to chat about is this Big Beautiful Bill was ginormous. How do you keep track of all of it? Do you attend conferences? How do you make sure everything possible can be used?
We have teams at our head office that manage this, including all the representatives out in the field and me. There’s a lot of training that goes on, and we have three different types of training calls that we can join. They’re about an hour, so we can get that caught up, and then they advise our clients. The Big Beautiful Bill was great for us because we were waiting for that 100% bonus. After all, even though the bonus had dropped to 20%, 40%, 60%, or 80%, it’s not as beneficial as a 100% bonus. Everybody was waiting for that 100% bonus to come back. And when it did in July, our phones blew up. People who were waiting started calling us. They were waiting for the loan rates to come down, and people are still waiting for that. The next thing is I’m waiting for the 100% bonus to come back.
Is there anything else that we haven’t covered that you think is important for our audience to know?
Don’t be afraid to ask and find out more. We offer a free estimate. I’ve got a landing page that people can go to and fill out. And then once I have that information, we can usually give you an estimate in a couple of business days. That way, you’ll know the range of savings we think we can bring you, what our fee is going to be, and that our fees are tax-deductible, as well. If someone owns a commercial building, they shouldn’t be afraid to at least investigate. If you’ve owned a property for 20 years, there may not be anything that we can accelerate to save you, but even if it’s an old building and you’ve only owned it for a couple of years, the depreciation clock starts over. We’ll look at how long you’ve owned it and see if we can’t save you some money by taking that depreciation faster.
The one thing I always ask people, “If you won the million-dollar lottery tomorrow, do you want to wait 40 years to get your money, or do you take the lump sum?
No.
Everybody says that, but it’s the same decision with accelerated depreciation, except you’re not taking a discount. You’re just recording dollars sooner and taking expenses sooner, which means those expense dollars are going to be worth more than depreciation dollars 5 or 10 years from now. It’s the same decision: the time value of money. It’s the same decision point. Give me the money now.
Unlike 1031 exchanges, where you eventually have to pay tax. For this one, it’s not the case. You’re just depreciating it sooner.
And you can do cost segregation on 1031, as well. You’re paying less as you’re kicking it down the road, and that’s even better.
One more question I heard before is that there is a certain property price that is not really worth it for the bonus depreciation. What would that be?
Different companies have different minimums. Cost Segregation services require a minimum of $200,000 of building value. If you bought a building, let’s say it’s a rental house for $200,000, we have to subtract the land value from that. Depending on where you are, land value may be a big piece of your purchase price. Once we take the land value out, if it’s around $200,000, that’s something that may make sense. If it’s less than that, it may not make sense.
Tom Brodie
CSSI – Cost Segregation Services
(713) 906-3710
tom.brodie@cssiservices.com
www.CSSIServices.com/tom-brodie