When it comes to tax strategies in real estate, bonus depreciation is a game-changer. It allows investors to accelerate their deductions upfront, which then creates a significant cash flow in their early years of ownership. 

But here’s what you may not realize: depreciation is not free money you expect to have forever. When you sell it, the IRS expects you to “recapture” some of those deductions.

Therefore, you need to know how recapture works and the ways that it affects your exit strategy. This way, you can avoid any surprises that could be costly. Let’s help you break it down.

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A Smarter Way to Think About Bonus Depreciation and Recapture

Bonus depreciation can give you a big tax benefit now and set up future obligations. When you sell a property, the IRS may recapture those depreciation deductions. This means you could owe taxes on the amount you wrote off earlier.

That, however, doesn’t mean that bonus depreciation is a bad move. It simply means you need to factor this recapture into your exit planning. With the right strategy, you can still maximize benefits without losing ground when the time comes for you to sell..

Typically, this is how depreciation recapture works for you as an investor:

1. Ordinary income treatment: Depreciation that is recaptured is usually taxed as ordinary income. It is not the lower capital gains rate.

2. Impact of cost segregation: Deductions that are accelerated from cost segregation studies could increase the portion of the recapture.

3. Taxable gain calculation: Recapture is usually considered before you calculate capital gains. This can increase your total tax bill.

4. Cash flow tradeoff: You save now but may owe more later if you don’t plan properly.

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Turning Recapture Into an Opportunity with Smart Planning

The key is not to avoid bonus depreciation, but to actually use it wisely. Many investors grow their wealth by pairing their upfront tax savings with intentional exit strategies. This ultimately reduces the impact later.

These are some approaches that you could consider:

• 1031 exchanges: Roll your proceeds from the sale into a new property. Then, defer both capital gains and recapture taxes.

• Holding it long-term: You could keep the property longer. This maximizes your cash flow benefits before you make any sale.

• Strategic refinancing: Having access to your equity without triggering a taxable event could reduce the pressure for you to sell.

• Partial asset dispositions: Get rid of a few components in your property instead of the whole property. Its strategy helps to manage the recapture more gradually.

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How Investors Can Stay Ahead of Recapture Rules

If you check, the most successful investors treat bonus depreciation and recapture as part of the same equation. So, instead of thinking of depreciation as free money, they think of it as a tool for timing. They take their deductions now and plan to minimize the tax impact later.

That means staying proactive by:

1. Working closely with advisors who understand real estate and cost segregation.

2. Knowing whether you’re holding, selling, or exchanging before you even buy.

3. Checking your depreciation and exit strategy as markets and tax laws change.

4. Estimating your potential recapture in advance

5. Using your savings to enhance your position.

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Helping Investors Manage Their Exit Strategies 

We empower buyers, sellers, and investors to make decisions that greatly benefit them. We do this by combining different upfront tax strategies with clear exit planning. With this, you can then apply your exit strategies early and take advantage of them. Let's put it to work for you.

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