The Tax Cuts and Jobs Act signed by President Trump in late December came with a lot of goodies for the owners of rental properties, especially in the area of depreciation.
Bonus depreciation is back, and includes used property
Through 2022, and retroactive to September 27, 2017, property owners can take 100% bonus depreciation on eligible property. But in 2023, the percentage will drop by 20% a year, until it’s all gone in 2027.
Eligible property must have a depreciable life of less than 20 years, and this must be the first use of the property by the owner. This includes carpeting, appliances, hot water heaters and land improvements such as driveways and landscaping.
For the first time, used property will be eligible for bonus depreciation. This means that the owner of a residential rental can refurbish a property with used appliances and write it all off in the first year.
Section 179 expensing expanded to include rental property
Previously, property “used predominantly to furnish lodging or in connection with furnishing lodging,” i.e., residential rental property, was excluded from section 179. Now, however, this same property is eligible for section 179 treatment.
The dollar limit was increased to $1 million, phasing out at $2.5 million in purchases. These amounts are indexed for inflation, and the increased limits are permanent.
This means that the owners of residential rentals can choose between taking bonus depreciation or section 179 on the carpeting, appliances and hot water heaters that they regularly replace. Both provisions allow landlords to immediately write off the cost of these items.
An advantage of bonus depreciation over section 179 is that it can be used to create a loss. Section 179 deductions are disallowed when they cause a loss. Any excess must be carried forward to the future until it’s used up. Another advantage of bonus depreciation over section 179 is that there are no limits to the amount of the deduction. Section 179 is limited to $1 million, and this limit is calculated at the individual tax return level.
Call our office today to discuss the best tax saving strategy for your rental properties!