top of page

CLIENT EDUCATION    Commercial Tax Strategy

Section 1: My Journey Should Sound Familiar

My journey should sound familiar. Mine started in 2010, working under two of the most respected
companies in the commercial real estate industry. By 2017, it was time for me to start my own
commercial advisory company which I still own today, HarborWest. We started out of the gate strong,
and business volume since has only grown exponentially. I’ve enjoyed seeing my income reflect the
years of hard work and sacrifice, from college all-nighters to sunrises at the corporate office.
However, that success placed me right into the highest 37% federal tax bracket. I’ve also lived and
built my life in California, which has the highest state income tax in the country at over 13%. It felt like
the harder that I worked to grow my income and career, the heavier the tax law was penalizing me.

That frustration became almost overwhelming after seeing how poorly the government was spending
my money. Nickel-and-diming home office deductions wasn't going to fix that, I refused to participate
in any of those audit-triggering tax scams (I walked out of a presentation on “charitable conservation
easements” in the first 6 minutes), and it wasn't realistic to pack up and move my family out of
California to save a few bucks living in a different 0% income tax state.

I became absolutely obsessed with researching the “magic formula” for the most lucrative tax
deduction strategy that I could legally utilize for my situation. I spent months comparing advice from
CPAs & tax strategists, tax attorneys, ultra-high-net-worth clients, trusted senior colleagues and deep
online research. The rich know exactly how to scale and protect their money, and if you spend enough
time in the same room with them – you’re bound to learn something. I learned that tax law actually
rewards high income earners, if you know how to use your money effectively. Additionally, it turned
out that the path to zero taxes can be scaled, and was directly tied to the industry I’ve spent 12 years
in becoming an industry expert - commercial real estate. After implementing the required strategies
for myself into a repeatable system over the past three years, I wanted to create a path to zero taxes
blueprint for other high income earners that were feeling my same pain every tax season. This brief
guide will outline and explain that process, which I hope is as enlightening to you as it was to me.

There’s no catch here, which is what I would be asking if I was you. My commercial real estate
company is setup to quarterback multiple stages of this process and provide resources for the
remaining stages which would be handled by handpicked specialists we’ve partnered with. We’ve
perfected this system - everything presented herein you can research yourself, we've just provided
the cheat code to save you time. If we’ve earned some good faith with you after absorbing our
strategy, I hope we can setup a call together to discuss working together. If you decide the strategy is
not for you, I hope you at least found the information interesting and inspired you in some way to
invest time into researching an approach that will be.

While the information presented in this publication has been CPA and attorney reviewed, it is strictly
for discussion purposes only and is not intended to provide tax, legal or accounting advice. Strategy
will vary drastically depending on your individual situation, tax code interpretation, and always subject
to everchanging tax laws. You should seek professional advice and conduct your own research before
engaging in any transaction or using any information on this guide for tax planning purposes.

Section 2: The Gold Key is Accelerated Depreciation.

The IRS tax code encourages or discourages certain actions that the government believes will lead
toward or away from economic growth. Most people understand there are a few general “write-offs”
they can claim, but never really take the time to understand or take advantage of the full scope of
what the IRS allows. Let me save you hours of research: the largest tax write-off available to
taxpayers is asset depreciation. The Federal government allows taxpayers to take eligible assets,
assign a life expectancy to that asset, and claim that asset depreciation as an expense every year
spread over the asset’s life. This is a “ghost expense” meaning it's only a loss on paper and that you
don’t actually incur any realized loss from that expense. What a beautiful thing, right?

The largest and most common asset most taxpayers can own and depreciate is real estate. Within real
estate, you have residential properties and commercial properties. Residential properties are
properties with at least 80% dwelling units and can be depreciated over 27.5 years - meaning
$1,000,000 worth of depreciable residential real estate, you can write off that “ghost expense” of
$36,363 per year. A commercial property is property for business use as opposed to living space
(retail, office, industrial, self-storage, etc.). Commercial properties are depreciated over 39 years,
meaning $1,000,000 worth of depreciable commercial real estate, you can write off a ghost expense
of $25,641 per year. This default method of spreading the depreciation evenly over the asset’s life is
called the “straight line method”.

  • Residential - $1,000,000 Example Value / 27.5 Years = $36,363 / Year Depreciation Expense

  • Commercial - $1,000,000 Example Value / 39 Years - $25,641 / Year Depreciation Expense

Most taxpayers are aware of the depreciation write-off, but what separates those that pay low taxes
versus zero taxes is cost segregation. Cost segregation in its simplest form can be defined as
accelerated depreciation. Depreciating a real estate asset over 27.5 or 39 years is the default method
and spreads the depreciation evenly over the life of the asset. A cost segregation study uses the
advanced method of depreciation and allows you to correctly classify different building components
that depreciate quicker than those defaulted time frames.

For example, a $150,000 commercial HVAC system using the default method over 39 years would
allow you to claim $3,846 per year of depreciation on that HVAC system. Using the advanced method
and re-classifying this example to its more accurate life (7 years in this case), your $3,846 expense
claim for this year now jumps to $21,428. Now imagine you could re-classify the entire property to
shorter asset life expectancies like this HVAC system to your advantage - the great news is that you
can. By performing a cost segregation study, which is an inspection report performed by a certified
professional, you receive a re-classification of a large chunk of the property’s components that you
can provide to your tax preparer to justify higher, accelerated depreciation claims when you file your
tax returns. Cost segregation eligibility varies drastically by property. There are properties that
qualify very well to have a high percentage re-classified and can dramatically lower your tax bill. There
are also properties that qualify very poorly, and only have a low percentage eligible to have its
depreciation life re-classified....

We would argue the two most critical factors are the property’s collateral basis and its complexity.
Collateral basis is the assessed value of the physical building. All properties are divided into building
value versus land value, which is assessed annually by the county tax assessor and oftentimes
different from what you may have paid for the property. The important thing to understand here is
that land is not depreciable.
So, with comparing two potential purchases at the same purchase price
and complexity, the property with the lower land value is going to have a larger depreciable basis.
CPA’s can consider land value reported from the county tax assessor or from an MAI-accredited
appraiser. We typically will utilize the lower of the two in order to maximize basis, and in some
scenarios might engage a property tax appeal process if applicable.

The below example compares the exact same purchase price, but with different assessed land value.
The default “straight line” depreciation difference is already noticeable, but now further imagine the
multiplied impact of the difference once cost segregation is applied.

Commercial Property #1 - Santa Monica, CA
Total Purchase Price = $3,000,000
Assessor’s Land Value = $1,800,000
Remaining Depreciable Building Value - $1,200,000
Straight-Line Depreciation = $30,769 / Year

Commercial Property #2 - Colorado Springs, CO
Total Purchase Price = $3,000,000
Assessor’s Land Value = $300,000
Remaining Depreciable Building Value - $2,700,000
Straight-Line Depreciation = $69,230 / Year

The second critical factor is the complexity of the property. In a cost segregation study, you are reclassifying
specific building components of the asset that will depreciate faster than the defaulted
straight-line method. Building components like equipment, HVAC, plumbing, electrical, pavement and
roofing are all re-categorized. So, the more components you have to re-categorize that would
depreciate sooner than the straight-line method, the larger your eligible depreciation write-off can be.
For example, an apartment building will be more complex than say a shell industrial warehouse, and a
specialized medical office facility is going to have better eligibility than that apartment building.

Commercial Property #1 - Specialized Medical Facility
Collateral Depreciable Basis = $5,000,000
Re-Classification Eligibility = 40.00%
Dollar Amount Re-Classified = $2,000,000

Commercial Property #2 - Shell Industrial Warehouse
Collateral Depreciable Basis = $5,000,000
Re-Classification Eligibility = 22.00%
Dollar Amount Re-Classified = $1,100,000

Section 3: Now, let's juice up this deduction.

There is an art and science to maximizing your tax deduction for accelerated depreciation. You are
going to have a set amount available to purchase investment property for depreciation anyways, so
let’s make sure to take every advantage available to purchase the most eligible properties for cost
segregation, and as much of it as we can, right?

Targeting highly depreciable commercial real estate properties will make that difference. As we
already discussed, markets with lower land value are going to maximize your collateral basis. With an
apples-to-apples purchase price compared to another market, the cost segregation study will need to
“juice up” the depreciation amount to the purchase price. Using the same comparison, a more complex
commercial property will have more re-classifiable assets to maximize your deduction.

Most real estate investors in the market are focused on the wrong benefit. They are chasing deals
that yield them a 6.0% return instead of a 5.85% return on their investment, a market that will
appreciate 5% in value year-over-year versus 4.2%, or a deal that has 25% upside in rents versus a
18% upside in rents. While we never want a tax decision to drive a business decision, this might be the
one scenario where it could make some sense. You are already a high-income earner through your
business or profession regardless of owning investment properties. You are not here to chase the
nickel and dimed cash flow; you are here for the larger benefit of significant depreciation.

Besides the investment property purchase decision strategies we implement, the second piece of this
is massive leverage through financing. Let’s say you have $1,200,000 to spend on an investment
property this year. Assuming all else equal, a financed property will allow you to purchase a larger
property which means more building and more depreciation. We would argue that leveraging an
investment property has the highest benefit multiplier compared to maximizing basis or complexity,
and the largest impact on your tax deduction as you'll see below. Securing favorable loan terms also
plays an important role in the long-term strategy. For example, having no prepayment penalty upon
early sale, or interest-only payments to stretch your cash flow if we are maxing out leverage (LTV).

Commercial Property #1 - All Cash Purchase
Down Payment Available = $1,200,000
Maximum Loan (LTV) = 0% LTV (All Cash Buy)
Eligible Purchase Price / Value = $1,200,000
Property Land Value = $500,000
Collateral Depreciable Basis = $700,000

Commercial Property #2 - Financed Purchase
Down Payment Available = $1,200,000
Maximum Loan (LTV) = 65% LTV (Financed)
Eligible Purchase Price / Value = $3,600,000
Property Land Value = $500,000
Collateral Depreciable Basis = $3,100,000

The final strategy to maximize your accelerated depreciation tax deduction on top of purchase
strategy and leveraged financing is taking advantage of "bonus depreciation". Bonus depreciation
was significantly modified by the Trump Administration in 2017 through the Tax Cuts and Jobs Act and
enacted at the end of 2018, and more recently by the CARES Act of 2022. Bonus depreciation allows
certain assets including real estate to be deducted at a much faster rate in the first year of ownership.
So, cost segregation re-classifies your property from a standard depreciation schedule into an
advanced and accelerated depreciation schedule. Allowed bonus depreciation then allows those reclassified
depreciation components that can be categorized under 20-year schedules or less, to be
claimed and deducted in “year one” of ownership.

With bonus depreciation stacked on top of cost segregation, you have an extremely powerful and IRS
approved toolbox to very realistically create enough of a paper loss to pay zero taxes. To the extent
there is a remaining depreciation carry-over balance in “year one”, this amount can be used to offset
income on a “go forward” yearly basis.

Since 2018 and through 2022, first year bonus depreciation is set at 100%. However, the Tax Cuts and
Jobs Act stipulates that first-year bonus depreciation will phase out through 2026. Unless the
government changes or renews first year bonus depreciation legislation, the phase-out schedule will
be as follows:

  • 100% for property placed in service during calendar year 2022

  • 80% for property placed in service during calendar year 2023

  • 60% for property placed in service during calendar year 2024

  • 40% for property placed in service during calendar year 2025

  • 20% for property placed in service during calendar year 2026

What this means is that we have a very short window to take this lucrative bonus tax advantage that is
soon to phase out. While cost segregation strategies are not likely to go anywhere anytime soon,
bonus depreciation is timely. The good news is that first-year depreciation allowance is still significant
over the upcoming years, and keep in mind, losses can be carried forward year-over-year.

So, you now hopefully understand that the path to zero taxes is paved by...

  • Smart Commercial Real Estate Investing Decisions, combined with...

  • Maximizing the right Tax Code Strategies you can apply to them

Section 4: Rinse, Repeat and Grow the Process.

Once you’ve purchased your commercial real estate investment property and utilized the tax
strategies that you’ve just been introduced, you should hopefully be close to paying zero taxes for the
year. You might have even had enough paper loss to offset your annual income, and rollover the
additional losses to next year which is the first and most easily understood strategy to our long-term

A simple and full-proof annual strategy could be to purchase one investment property per year to
offset your income for that year. While that may work, depreciation on any given property will
eventually run out. If we are utilizing cost segregation and bonus depreciation, that timespan is
significantly shortened and your runway on any given property for accelerated depreciation will be
depleted rather quickly. You could continue purchasing new properties with a brand-new basis to
start its own depreciation schedule, but the downside to that strategy is that you are forever stuck
purchasing smaller properties, accumulating larger management responsibilities, and never able to
achieve scale or tap into your full “equity bank account” for that property to really grow exponentially.
Your second and smarter option, however, is to use that first property to purchase a larger property
and “rollover” into that new higher basis.

Here’s the catch: the IRS has allowed you to take massive paper losses through depreciation for your
investment properties. However, the key to remember is that your tax liability to the IRS has not been
waived, it’s only been delayed. The government can tax you upon the time of sale of that investment
property to recapture the taxes you delayed over the years, which is the “catch” you’ve probably been
waiting to read about. When you depreciate your property every year, your cost basis is reduced. For
example, if you purchased a building for $10,000,000 and depreciated $6,000,000 over the years,
now your basis is $4,000,000. So, when you sell the building for $15,000,000, the taxable gain is
$11,000,000 (or $15,000,000 - $4,000,000). This is what is referred to as “depreciation recapture.”
The government has allowed you the tax benefits of depreciation but when the property is sold, that
depreciation must be "recaptured." which at the time of this publication is taxed at a 25% rate.

So, how can we continue delaying that tax liability? There’s really only two ways, the first is a step-up
in basis. This occurs when the property owner dies, and the property is inherited by the owner’s heirs.
The inheritors do not take on the tax liability of the previous owner, and the due tax liability in essence
is “wiped away”. Waiting for someone to die for tax benefits is not only morbid, but inefficient. There’s
a better way which allows you to keep growing as a commercial real estate investor, while continuing
to delay the tax liability of the properties you depreciate over your lifetime, which is utilizing a very
common tax strategy in real estate called a 1031 exchange.

A "1031-exchange" is a tax strategy that allows you to sell an investment property and defer the
capital gains taxes due from that sale by rolling that equity or gain on sale into a new investment
property. The strategy refers to Section 1031 of the IRS tax code which stipulates that an owner can
re-invest sale proceeds from real estate used for either investment or business purposes (not
personal) into a replacement property (which must also be utilized for business or investment
purposes) to further delay tax liability if the transaction meets specific requirements.

The rules and regulations surrounding a proper 1031-exchange can be complex, but there are a few
general guidelines that you should know about above all others for this process...

  • 1.) Eligible sale proceeds must be held by a third-party, licensed 1031 accommodator

  • 2.) Replacement property #2 must be “like-kind”, with value & debt larger than property #1

  • 3.) You have 45 days to identify and report up to (3) Potential replacement properties

  • 4.) You have 180 days from the closing of the initial sale, to close the replacement sale

If the investment property you sold has appreciated in value since purchase, and even more so if
you’ve reduced the principal loan amount of any financing used, your gain on sale is going to be larger
than the amount you used to initially purchase it. If utilized correctly, you can use the entirety of that
gain as down payment on a larger replacement property for your 1031 exchange. While your
depreciation depletion will rollover into this new property, you’ve now leveraged and used the gain to
in essence purchase additional untapped basis to keep depreciating, all while deferring those taxes.

Residential properties (1-4 units) are eligible for cost segregation benefits and 1031-exchanges, but
we highly recommend and support commercial properties only. Residential properties are going to
“tap out” after the first transaction or two. As you trade up to larger properties over the years,
commercial properties are going to be your focus – there’s not too many $2,000,000 duplexes out
there, and the one’s that do exist – imagine the location and land value. How is that going to fare for
maximizing your depreciable basis? High leveraged residential properties can also cause major 1031-
exchange issues if the replacement “upleg” property cannot qualify to replace the debt on the
relinquished “downleg” property. Lastly, commercial properties typically have higher depreciation reclassifications
with shorter asset life components, and generally more lucrative value-add potential.

We’ve summarized the process into an infographic on the following pages, but we’ve now completed
the process from start to finish. Rinse, repeat and keep growing your passive income and net worth, all
while claiming the most lucrative tax deductions available to us by the IRS tax code.

Again, What a Beautiful Thing, Right?

Section 5: Assessing Your Qualification.

The first prerequisite is that you must be ready to be a real estate investment property owner.
Although it sounds simple, there are many people that are not in the right position to be real estate
investors at this time. That could be because of low risk tolerance, opportunity cost for other
investment alternatives, inability to qualify for a commercial mortgage or leveraged financing, or an
intolerance for the responsibilities that come with being a landlord - including property management,
legal liability risks and uncontrollables like market and economy fluctuations. These risks can of course
be mitigated to some degree, but performing a self-assessment of your risk tolerance and
qualification, and then consulting your advisory team (real estate agent, mortgage broker, tax
preparer and attorney) is really the first step.

Assuming you’ve pre-qualified yourself and are ready to start your own journey to zero taxes,
ensuring you are in compliance with the IRS tax code to claim these significant deductions will be
essential. Paper losses that you will incur through this process are considered passive losses and can
only be used to offset passive income. So, you could easily offset the income of your investment
property through depreciation, and rollover any additional depreciation losses to future tax years.
However, we’re here because you are a high income active earner. So, unless your income is from
being a full-time real estate investor, you likely generate your high income from being a business
owner or high salary W-2 employee. This is considered active income, which generally cannot be
offset by passive losses according to the IRS.

This might be disappointing to read after learning the potential of this tax strategy process, but pick
your head up - there are a few solutions to make your W-2 salary or active income eligible to be offset
by the passive depreciation losses that will be created. That solution is qualifying for something called
Real Estate Professional Status (REPS).

Real Estate Professional Status (REPS) is a tax status within the IRS code that allows real estate
professionals to deduct their passive losses from their active taxable income. Eligibility for this tax
status is a somewhat detailed process, but there are two (2) primary qualification for REPS.

1.) Material Participation
Your material participation in real property trades and businesses should account for at least
of all the personal services you rendered throughout a year.

2.) Qualifying # of Hours
You spend over 750 hours in actual trade and businesses involving your material participation.

In short, you must declare real estate as your primary profession and be able to provide evidence of
your time spent within the profession on an annual basis. If you are a business owner, it will be
somewhat easier to actively participate in real estate activities for your current and potential
investment properties in order to justify qualifying for Real Estate Professional Status (REPS).
However, if you are a full-time salaried professional (W-2) that becomes more difficult to honestly

The most common and successful workaround however to qualify your W-2 active income to be
eligible to be off-set by passive losses, is by having your spouse qualify for REPS status and jointly
filing your tax return. While this might not be an available option to single W-2 earners, or W-2
earners with spouses that already have dedicated careers, it is simply the easiest and most justifiable
route that is recognized and accepted by the IRS for REPS status. You can imagine the tax
consequences if your interpretation of the tax code was incorrect, so I would argue that meeting with
an experienced attorney and tax planner within this specialty to ensure you are setup properly to
legitimately qualify for REPS status and understand the ongoing record keeping responsibilities, is the
most crucial piece of this process. Otherwise, the outlined tax strategy means nothing if we can’t
meaningfully use it to off-set your taxable income.

Your individual situation also determines the commercial property types we need to target in order
to qualify for this. For example, if your REPS qualifying hours will be based on managing your own
portfolio (and not based on real estate services), acquiring an easy NNN leased property that runs
itself already or a large apartment building that would require you to hire an on-site manager, would
make it hard to justify your material participation. For this example, we may target light value-add
properties in your state that would need your attention for stabilization, but not demanding enough to
require hiring a professional management company.

You might read in other publications the argument that investing in short-term rentals (STR) is a
loophole around REPS in order to apply passive losses to active income. We would argue that this
however is just that, a temporary “loophole” that will eventually be closed by the IRS. There has been
some recent case law where STRs are viewed separate and distinct from a “real estate trade or
business” and we believe this is not a long-term solution or strategy. This route also additionally opens
up unnecessary hurdles – AirBnB operator headaches, unfavorable financing, everchanging permitting
laws, and simply not being scalable for this long-term plan.

If you are simply not in a life situation to have you or your spouse qualify for REPS, this can still be an
attractive, just not as lucrative, long-term tax strategy for you. Your active W-2 income might remain
taxable, but you can still pay zero taxes on your commercial investment property income, and rollover
those large losses into future tax years to continue predictably offsetting that passive income.

Section 6: Okay, Let's Put It All Together!

Every piece of this tax strategy process has its own complexities and can only be successful if they
are each properly implemented. We’ve put together a strategic team of specialists to take care of each
stage, in order to ensure your investment process is as seamless and confident as possible. When
you’re ready to talk more and get your questions answered, we’ll be here. In the meantime, let’s
summarize what we’ve now learned and the process to start your journey to zero taxes!

Step ONE: Real Estate Advisory Process.

  • Determine your available funds to invest for this year’s purchase

  • Identify your real estate investment strategy, goals, and disqualifiers

  • Establish pre-qualification for financing on leveraged purchase

  • Execute investment property purchase process with your Broker

Step TWO: Tax & Legal Advisory Process.

  • Setup proper entity structure(s) for this year and future transactions

  • Establish eligibility for Real Estate Professional Status (REPS) with CPA

  • Tax planning to ensure sound strategy and proper records keeping

Step THREE: Implementing the Strategy.

  • Conduct Cost Segregation study for the new investment property

  • Apply property Cost Segregation report results to your tax preparation

  • Apply Bonus Depreciation for Y1 & subsequent years on drop schedule

Step FOUR: Rinse, Repeat & Grow.

  • Identify tax year that you have diminishing returns of depreciation

  • Sell depleted investment property in that tax year as 1031-X downleg

  • Disburse the proceeds/gain on sale into a 1031-exchange account

  • Purchase larger property at higher basis, leveraged using Financing

Your long-term strategy is to keep repeating the above process of purchasing commercial investment
property, maximizing depreciation through cost segregation and bonus depreciation, selling your
appreciated properties, and using 1031 exchanges to rollover your untaxed gains into larger properties
with higher bases. Continuing to grow your nest egg and delaying tax liability until the time of your
passing, when the IRS will recognize that your heirs are gifted a “basis step-up” and the tax liability is
completely forgiven - "swap 'till you drop".
What a legacy to leave your children!

Section 7: Zero Tax BluePrint, A Case Study.

Our example case study assumes that you are a high income W-2 professional living in an income tax
applicable state with a stay-at-home spouse. Your salary income is $750,000 per year and you’ve
grown a savings account over the past few years to $800,000 that you are ready to put to use. You’ve
consulted with our team and are ready to take advantage of the process to offset your $750,000
income you expect for tax year 2022.

You’ve determined with us that your general real estate investment strategy is that you want to invest
in multifamily commercial as your preferred asset class, within larger MSA markets, and would like to
be within a two-hour flight to the property. You are comfortable utilizing your full $800,000 savings for
the new investment purchase, and we secure a 15-unit apartment complex in Phoenix, AZ for
$2,400,000 with 65% LTV financing.

Property Purchase
$800,000 - Available Down Payments
+ $1,600,000 - Mortgage Financing (65%)
$2,400,000 - New Property Purchase Price


Determining Basis
$2,400,000 New Property Value
- $400,000 Land Basis
$2,000,000 Depreciable Basis


Apply Cost Segregation
$2,000,000 Depreciable Basis
> 38% Cost Segregation Re-Classified
$760,000 Re-Classified Depreciation


Apply Bonus Depreciation
$760,000 Re-Classified Depreciation
x 100% Bonus Depreciation for 2022
$760,000 Depreciation Write-Off


Offsetting Your 2022 Income
$760,000 Depreciation Write Off
+ $750,000 W-2 Income for 2022
- $10,000 Adjusted Taxable Income


Determine Tax Liability
- $10,000 Adjusted Taxable Income
x 42.2% Example Effective Tax Rate
= $0 Tax Liability Owed

Zero taxable income in this example, in fact there’s $10,000 in losses that will rollover into the next
year. The above is an extremely simplified example to help understand how the process ties together,
there are other factors to consider including transaction costs, third party costs and your own
personal tax considerations which are unique to you. But, you can see how this comes together.

Let’s take the case study a step further however and model the long-term strategy, assuming you sell
the property early in Y2 (2023) and have saved an additional $400,000 during the year while your W-2
has remained at $750,000 per year for 2023. We will also make some general assumptions on the land
basis, transaction costs and cost segregation of the new replacement property...

Adjusted Basis Property #1
$2,000,000 Original Depreciable Basis
- $760,000 Y1 Bonus Depreciated 2022
$1,240,000 Adjusted Basis Property #1


Selling Property #1
$2,650,000 Appreciated Value
- $130,000 Transaction Costs
- $1,550,000 Remaining Mortgage
$970,000 Proceeds > 1031 Funds


Property Purchase #2
$970,000 1031 Sale Proceeds
+ $400,000 Additional Savings
$1,370,000 Available Down Payment
+ $2,750,000 Mortgage Financing (65%)
$4,120,000 - New Property Purchase Price


Determining Rollover Basis
$4,120,000 New Property Value
- $600,000 Example Land Basis
$3,520,000 Depreciable Basis #2
- $1,240,000 Rollover Basis Property #1
$2,280,000 Adjusted Rollover Basis


Apply Cost Segregation
$2,280,000 Depreciable Basis
> 38% Cost Segregation Re-Classified
$866,000 Re-Classified Depreciation


Apply Bonus Depreciation
$866,000 Re-Classified Depreciation
x 80% Bonus Depreciation for 2023
$693,000 Depreciation Write-Off


Offsetting Your 2023 Income
$693,000 Depreciation Write Off
- $10,000 Rollover loss from 2022
+ $750,000 W-2 Income for 2023
+ $47,000 Adjusted Taxable Income


Determine Tax Liability
+ $47,000 Adjusted Taxable Income
x 42.2% Example Effective Tax Rate
= $19,000 Tax Liability Owed

Download PDF!

bottom of page