Can I use bonus depreciation to offset long term capital gains from multi family sale as a real estate professional?

As a frequent contributor to tax discussions, I can shed some light on your situation. Bonus depreciation and capital gains are actually treated differently in the tax code, so they don't directly offset each other. Long-term capital gains from selling your multifamily property are taxed at capital gains rates (typically 15% or 20% depending on your income bracket, plus potentially the 3.8% NIIT). Bonus depreciation, on the other hand, is a form of accelerated depreciation that can offset ordinary income, not capital gains. Your status as a real estate professional is helpful for avoiding passive activity loss limitations, but it doesn't change how capital gains are treated. What you might want to consider instead: 1. A 1031 exchange if you're reinvesting in similar property (though the timeline requirements are strict) 2. Opportunity Zone investments can defer and potentially reduce capital gains taxes 3. Installment sales could spread the gain over multiple years These strategies need to be executed properly with strict timelines, so I'd recommend consulting with a CPA who specializes in real estate immediately.

I discovered a tool that might really help with your situation! After selling a duplex last year and facing similar questions about depreciation and offsetting gains, I was going in circles trying to understand my options. I eventually used https://taxr.ai to analyze my specific situation and it clarified everything. It basically looked at my real estate professional status, my entity structure, and my previous depreciation schedules to give me personalized recommendations. The tool outlined several strategies specific to real estate professionals that I hadn't considered - including some creative approaches to the 1031 exchange timing that saved me a bundle. The best part was getting clear explanations about what actually works for capital gains versus ordinary income, which cleared up a lot of confusion.

I have to admit I was wrong about tax tools. After seeing how detailed the conversation was getting here, I decided to try https://taxr.ai with my own real estate portfolio. What impressed me was how it handled my complicated ownership structure across multiple LLCs and identified a strategy I hadn't considered. The tool correctly identified that while bonus depreciation doesn't directly offset capital gains, I could use a combination of cost segregation on new properties along with timing strategies to significantly reduce my overall tax burden. It even spotted a mistake in how I'd been handling the QBI deduction with my real estate professional status. For anyone dealing with complex real estate tax situations like we are, it's definitely worth checking out. Saved me from making what would have been an expensive mistake with my recent property acquisition.

Just want to share something that helped me when I was in a similar position last year. I had a huge capital gain from selling an apartment building and was desperately trying to talk to someone at the IRS about my options. After weeks of calling and never getting through, I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c They basically got me connected to a real IRS agent within about 20 minutes when I'd been trying for weeks. The agent walked me through my specific situation with real estate professional status and capital gains limitations. They confirmed that while bonus depreciation wouldn't directly offset my capital gains, they helped me understand exactly how the 1031 exchange would work with my LLC structure. Having that official clarification before making my next investment was incredibly valuable. The peace of mind alone was worth it.

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Something no one's mentioned yet - cost segregation studies paired with bonus depreciation can be powerful for offsetting ORDINARY income (not your capital gains). Since you're a real estate professional, you're not subject to passive loss limitations. So while it won't help with your immediate capital gains issue, if you're buying more properties, a cost seg study could potentially help offset other income. Just remember bonus depreciation is phasing down - it's 80% for 2023, 60% for 2024, 40% for 2025, and 20% for 2026. For your actual capital gains, the 1031 exchange is probably your best bet if you're reinvesting in more real estate anyway.

Has anyone gone the Opportunity Zone route instead of 1031? I'm considering both options for a similar situation (selling a 4-plex with significant gains). From what I understand, Opportunity Zones let you defer capital gains until 2026 but don't require you to buy similar real estate - you could invest in a qualified Opportunity Zone Fund instead. Seems more flexible than 1031 in some ways.

As someone who's navigated similar waters with multiple property sales, I want to add a few practical considerations that might help with your decision-making process. First, regarding the bonus depreciation question - while it won't directly offset your capital gains as others have mentioned, don't overlook the timing strategy. If you're planning to acquire new properties anyway, accelerating depreciation through cost segregation studies on those new acquisitions can help offset other ordinary income, freeing up cash flow that can help with the tax burden from your capital gains. Second, something to consider with your LLC structure - make sure you understand how your partnership agreements affect any 1031 exchange. If you and your business partner have different investment timelines or risk tolerances, this could complicate a like-kind exchange. You might need to restructure or consider a "drop and swap" strategy. One often-overlooked strategy for real estate professionals is the installment sale method. If you can structure seller financing on your next acquisition (even partially), you can spread the gain recognition over multiple years while potentially getting a better overall return than traditional financing. Given the complexity of your situation with multiple LLCs and real estate professional status, I'd strongly recommend getting a second opinion from a tax professional who specializes in real estate before making any final decisions. The strategies mentioned here all have strict timing requirements and potential pitfalls.

Great discussion here! As someone who's dealt with similar capital gains situations, I wanted to add a perspective that might be helpful. While everyone's covered the main strategies well (1031 exchanges, Opportunity Zones, etc.), there's one angle worth considering given your real estate professional status: the timing of when you recognize income versus deductions across your various LLCs. Since you're not subject to passive activity limitations, you have more flexibility in managing the timing of income and deductions across your portfolio. If you're acquiring new properties, you could potentially accelerate certain deductible expenses (like repairs, improvements that don't qualify for capitalization, or professional services) into the same tax year as your capital gains recognition. Also, don't forget about the Section 199A QBI deduction - as a real estate professional, your rental activities should qualify for the 20% deduction, which can help offset some of the overall tax impact even if it doesn't directly reduce the capital gains. One last thought: if you do go the 1031 route, consider whether a reverse exchange might give you more flexibility. It's more complex but allows you to acquire the replacement property first, which can be advantageous in competitive markets where good properties move quickly. The key is running the numbers on all these strategies with your actual figures to see which combination gives you the best after-tax result.