The Hidden Gem that is Depreciation!

It’s common knowledge that you can reduce your tax obligation by investing in real estate to take advantage of depreciation. However, many people are unaware that, under current tax law, a “magic” bonus depreciation allows you to accelerate your deductions.

Let’s assume, for example, that you earn around $300,000 per year. Typically, that would place you in a high tax bracket, significantly reducing your take-home pay. Here’s the calculation:

$300,000 – W2 income

-$105,000 – Tax (approx. 35%)

$195,000 – Net income

However, current tax law allows investors to accelerate their deductions with bonus depreciation. Instead of spreading the cost of qualifying assets over many years, it lets you deduct a much larger amount in the year your assets are placed in service. The government benefits because they assume the increased cash flow will spur business investment and growth. You benefit by having more money in your pocket.

So, let’s now assume that you also have a 10% membership interest in a $15 million hotel that was purchased with 35% equity, or $5,250,000, making your investment $525,000. To keep it simple, we will also assume that 80% of the purchase cost is the building and the remaining 20% is the land. That means you can take depreciation on roughly 80% of your investment, because dirt doesn’t wear out. A representative amount of accelerated depreciation is approximately 35% of the allowable number for hotels.

Under the current law, in 2024 you can take 60% of the bonus depreciation available to you, and in 2025 you can take 40%. However, Congress is considering allowing 100% bonus depreciation retroactively from tax years 2023 through 2025. For our example below (…and, in this case, you are a Real Estate Professional), let’s assume the law stays as it is, your $525,000 investment with a little bit of “magic” would boost your net income by $127,200 in the first year, while you continue to build equity and appreciation in the hotel. Here’s how that works:

$300,000 – W2 income

    42,000 – Hotel rental income

 -252,000 – Bonus depreciation

    90,000 – Adjusted taxable income

    x 22% – Tax rate (approx.)

   -19,800 – Tax obligation

  300,000 – W2 income

42,000 – Rental income

$322,200 – Net income

Let Opal Hotels Group help you increase your net income. Please see our latest offering for a TownePlace Suites and let depreciation work its wonder for you!

Contact Ravi Desai or Mital Patel to learn more!

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