Bonus depreciation lets you maximize your return and minimize your tax liabilities. With bonus depreciation, you can deduct a large portion of the cost of qualifying assets during the year they were placed in service.
Unfortunately, understanding bonus depreciation, how it works, and whether it’s right for your real estate investment strategy is no small feat—but that’s where we come in.
In this guide, we’ll walk you through everything you need to know about bonus depreciation.
What is Bonus Depreciation?
Your assets naturally depreciate over time due to use and general wear and tear. If you run a business, depreciation lets you write off a portion of your asset’s cost during its estimated “useful life” as long as:
- You’re the owner
- You use the asset in your business or other income-producing activity
- The asset’s useful life is greater than one year
In general depreciation, the portion you write off is equal to its estimated useful life. For example, let’s say you remodel the kitchen of your new rental property with cabinets that cost $7,000. Cabinets have a depreciation life cycle of seven years, meaning that you can claim $1,000 in depreciation for seven years.
Bonus depreciation accelerates this process. Instead of claiming $1,000 a year for seven years, you can get a lot more when you claim bonus depreciation. In 2022, you could claim 100% of your cabinet depreciation, meaning you’d get to write off all $7,000 immediately. Then, you can use the money saved via depreciation tax deductions on other things like reinvesting in your business.
Unfortunately, bonus depreciation is already getting phased out, so if you want to take advantage of massive tax write-offs, now’s the time.
How Bonus Depreciation Works
Let’s assume your kitchen cabinets actually cost $10,000. Here’s the phase-down schedule for the depreciation bonus:
| Year | Depreciation Bonus (%) | Claimable… |