Bonus deprecation explained

Car Wash Crew:

(Aside: the response to my Car Wash Cash Course has been unreal, grab your access here TaxFreeCashCow.com)

There's still a lot of confusion about bonus depreciation (BD).

Had an exchange with some very bright Tweeters the other day who had it wrong.

It's confusing! Took me a while to figure it out, so...

Let's break it down how I use it without being a Real Estate Professional.

WARNING: THIS IS NOT LEGAL OR FINANCIAL ADVICE AND YOU SHOULD 100% TALK TO A PROFESSIONAL ABOUT YOUR SITUATION.

Good? Good.

So the confusion stems from the fact there are CRE bros who are taking BD for their rental properties. Whether they're renting storage space or strip malls, the rules are very similar for most of them.

For a rental property, or a property that engages in simply renting space, buildings, and land, you generally need to be a real estate professional to be able to take BD on property you own. To be RE pro, you need to:

- Perform more than 50% of services in real property trades or businesses (“50% test”), AND

- Perform more than 750 hours of service in real property trades or businesses (“750 hours test”) AND

- Materially participate in each rental activity (“material participation test”).

If you've been around here a while you probably knew this. Most CRE bros get through this rule by doing RE full time, or they're an agent, or they often own a business in the trades (HVAC, plumbing, etc.).

Also, there's a loophole (if you will) for Short Term Rentals, or Airbnb businesses. They get to take BD too.

But I'm not doing any of those things, and still take BD.

How? Because I'm not doing 'real estate' in the traditional sense of buying and the renting property.

I am actually engaged in what we like to call a "business". And "businesses" get to take BD on equipment that has a life of 20 years or less.

For car washes, the buildings themselves also qualify - as do many other buildings.

The only rule for me is that I have to "materially participate" which means I have to spend 500 hours a year, or about 10 hours a week.

I AM DEFINITELY DOING THAT, UNCLE SAM. YESSIR, UH HUH. YEP. FASHO.

(I actually am, mostly because I am always on the lookout for NEW car washes to buy, but I digress)

In fact, even though I am buying the real estate along with my car washes, the real estate component is largely irrelevant. It's the improvements, the building and the equipment, that gets me these tax benefits.

In fact, car washes are almost perfect for BD, because the lot itself isn't that valuable usually. But the pumps, tanks, boilers, filtration systems, and dryers ARE valuable.

That means that up to 80% of the cost of a car wash is actually in the 'stuff' not the land. Which means you can have a HUGE deduction thanks to BD.

But there are many businesses that could qualify. Think about a business that has a lot of big vehicles like a plumbing co, or a liquor store with all of its coolers and refrigeration equipment. Or, AHEM, a dumpster company with trucks, trailers and dumpsters.

So BD is a powerful tool that many businesses can use, it's NOT just a tool for CRE bros.

Get it?

CWG

PS: if you want to start using this legal tax loophole to torch your tax bill, go to TaxFreeCashCow.com 

Do it now, this loophole is CLOSING.