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One of the biggest reasons to invest in real estate is the tax benefits, most notably bonus depreciation.
Bonus depreciation is a tax incentive that allows taxpayers to deduct the assets that they're investing in faster than they normally would. In other words, it accelerates depreciation.
Accelerated Depreciation in Real Estate
Normally, you would depreciate properties on a 27 year timetable, but there are different parts of the property that are able to be depreciated faster. For instance fixtures, carpeting, refrigerators, all have a shorter lifespan than 27 years.
By doing bonus depreciation, we can get the shorter lifespan to create a bigger tax benefit for the investors, and for a lot of investors, taxes are the biggest expense annually. So this is a big deal.
Bonus depreciation can allow them to write off huge amounts against the passive income. Many investors are writing off 50 to 80% of their initial investment in year one, so it's a big deal and big savings for investors.
Are investors typically able to capture bonus depreciation on Nighthawk deals specifically?
Yes, absolutely.
On every single deal we have done and will do, we always engage a Cost Segregation engineering firm to go out to the property and do a full audit of all the different aspects of the property, and provide a report that allows us to aggressively but accurately provide that deduction for the investors.
It depends on on this specific property. We can usually get 50 to 80% of their initial investment as a tax loss for their tax payment in the year one of their property. Now, that might not always be the case, because bonus depreciation is getting sunsetted. This year, 2022, is the last year of full bonus depreciation. Next year, it gets it goes down to 80%, and then the following year, down to 60%.
So the tax savings are very powerful right now. They will get a little bit less powerful in the future. But that's one of the reasons why it's so important to take advantage of these tax laws right now.
