Tax Deduction Eligibility

The Passive Activity Loss (PAL) Rules, introduced in 1986, are to prevent taxpayers from using "paper losses" (like depreciation) from investments to offset their highly taxed Active Income (like wages or business profits). It's called the "bucket rule" because IRS divides all your income and losses into 3 buckets. 1. Active: Wages (W-2), Salary, Business Profit (Schedule C) where you Materially Participate. Can be offset by losses from other Active activities. 2. Portfolio: Interest, Dividends, Royalties, Capital Gains from investments (stocks, bonds). Cannot be offset by Passive Losses. 3. Passive: All Rental Activities (RE), or Business Activities where you DO NOT Materially Participate (e.g., a limited partner). Passive Losses can ONLY offset Passive Income. If your rental property generates a $20,000 tax loss (due to depreciation), you cannot use that loss to reduce the tax on your $100,000 W-2 salary (Active Income). The $20,000 loss is suspended and carried forward. An activity is passive if it is: - Any Rental Activity: Rental real estate is passive by nature, regardless of how much time the owner spends on it. - A Trade or Business in which the taxpayer does not Materially Participate. Material Participation is defined by the IRS using 7 tests, the most common of which is working more than 500 hours in the activity during the year on a regular, continuous, and substantial basis. While losses are generally suspended, there are 2 main ways to free them up: 1. Individuals whose MAGI < certain threshold can deduct up to $25,000 of passive RE losses against their Active and Portfolio income. - The owner must "Actively Participate" (a lower standard than Material Participation, usually met by making management decisions like approving tenants or deciding on repairs). - This $25,000 allowance is phased out for taxpayers with MAGI between $100,000 and $150,000. If your income is over $150,000, this exception disappears entirely. 2. This is the "Holy Grail" exception for full-time RE investors. If a taxpayer qualifies as a RE Professional, their rental activities are NOT automatically considered passive. - To Qualify: a) > 50% of the personal services performed by the taxpayer in all trades or businesses during the year are performed in real property trades or businesses. b) The taxpayer performs > 750 hours of service during the year in real property trades or businesses (such as development, construction, brokerage, or property management). - If the taxpayer meets the REP tests and can show Material Participation (e.g., meeting the 500-hour test) in the specific rental properties, those losses become Active Losses and can offset W-2 income or business profits without limit. Q: What happens to the total amount of "suspended" passive losses when a taxpayer finally sells the entire passive activity (e.g., the rental property) in a fully taxable transaction? Follow @thetaxsaaab on Instagram.

Washington just dropped a legislative bombshell on the real estate world — and it’s packed with opportunity for those who know how to act fast. The One Big Beautiful Bill Act, signed into law on July 4, 2025, isn’t just a tweak to the tax code — it’s a complete reshaping of how investors structure deals, time acquisitions, and unlock tax advantages. Here’s what stands out: ✅ 100% Bonus Depreciation is Back — Qualifying property placed in service after Jan. 19, 2025 can be written off in year one. With the right cost segregation, that could mean millions in deductions on a single deal. ✅ Section 179 Expensing Expanded — Up to $2.5M of certain property improvements can be deducted immediately. Perfect for projects under $5M that need big upgrades without slow depreciation schedules. ✅ Green Incentives on a Countdown — Energy-efficient building deductions (179D) and residential credits (45L) phase out after June 30, 2026. If sustainability is part of your plan, the clock is ticking. ✅ 1031 Exchanges Stay Alive — Pairing exchanges with bonus depreciation just became a tax-efficiency powerhouse. ✅ New Opportunity Zones Coming in 2027 — Fresh designations mean new chances to align with growth markets early. This law is live now — and some of its best incentives are already on the clock. The investors who adjust fastest will capture the biggest benefits. At CPI Capital, we’re already mapping how these changes influence underwriting, project feasibility, and long-term returns. If you’re planning acquisitions, developments, or value-add projects in the next 24 months, now is the time to align your tax strategy with the new rules. #cpicapital #realestateinvesting #taxstrategy #wealthbuilding #obbba2025

Let's discuss a 𝐫𝐞𝐚𝐥 𝐥𝐢𝐟𝐞 𝐭𝐚𝐱 𝐩𝐥𝐚𝐧𝐧𝐢𝐧𝐠 when a client who 𝐛𝐨𝐮𝐠𝐡𝐭 an old 𝐡𝐨𝐮𝐬𝐞, demolished it, and built a new one to generate 𝐫𝐞𝐧𝐭𝐚𝐥 𝐢𝐧𝐜𝐨𝐦𝐞. Let's discuss how smart planning helped a client save thousands in taxes. Mr. A bought an old house with the plan to 𝐝𝐞𝐦𝐨𝐥𝐢𝐬𝐡 it and 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐜𝐭 𝐚 𝐧𝐞𝐰 𝐫𝐞𝐧𝐭𝐚𝐥 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐲. But here’s where the 𝐭𝐚𝐱 𝐢𝐬𝐬𝐮𝐞 comes in. Suppose the 𝐩𝐮𝐫𝐜𝐡𝐚𝐬𝐞 𝐩𝐫𝐢𝐜𝐞 of the property was $𝟑𝟎𝟎,𝟎𝟎𝟎. According to the county records, $𝟔𝟎,𝟎𝟎𝟎 was allocated to 𝐥𝐚𝐧𝐝 and $𝟐𝟒𝟎,𝟎𝟎𝟎 to the 𝐛𝐮𝐢𝐥𝐝𝐢𝐧𝐠. Later, Mr. A spent $𝟓,𝟎𝟎𝟎 on 𝐝𝐞𝐦𝐨𝐥𝐢𝐭𝐢𝐨𝐧 and $𝟏𝟓𝟎,𝟎𝟎𝟎 on 𝐧𝐞𝐰 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐜𝐭𝐢𝐨𝐧. Now, under IRS rules, when a building is demolished, the 𝐞𝐧𝐭𝐢𝐫𝐞 𝐛𝐚𝐬𝐢𝐬 of the 𝐨𝐥𝐝 𝐛𝐮𝐢𝐥𝐝𝐢𝐧𝐠 ($𝟐𝟒𝟎,𝟎𝟎𝟎) plus the demolition cost ($5,000) gets added to the 𝐥𝐚𝐧𝐝 𝐛𝐚𝐬𝐢𝐬. That means the 𝐥𝐚𝐧𝐝 𝐛𝐚𝐬𝐢𝐬 becomes $𝟑𝟎𝟓,𝟎𝟎𝟎, which is non-depreciable. The new 𝐛𝐮𝐢𝐥𝐝𝐢𝐧𝐠 𝐛𝐚𝐬𝐢𝐬 would only be $𝟏𝟓𝟎,𝟎𝟎𝟎. This creates a problem. The $240,000 of the old building is lost for 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 purposes. Ideally, that amount should have been depreciated to 𝐫𝐞𝐝𝐮𝐜𝐞 𝐭𝐚𝐱𝐚𝐛𝐥𝐞 𝐢𝐧𝐜𝐨𝐦𝐞. Instead, it 𝐠𝐞𝐭𝐬 𝐥𝐨𝐜𝐤𝐞𝐝 into the land value, which provides no tax benefit. But there is a smarter way to plan. Instead of demolishing immediately, Mr. A could 𝐟𝐢𝐫𝐬𝐭 𝐮𝐬𝐞 the old building as a 𝐬𝐡𝐨𝐫𝐭-𝐭𝐞𝐫𝐦 𝐫𝐞𝐧𝐭𝐚𝐥 (𝐒𝐓𝐑) for 𝐨𝐧𝐞 𝐲𝐞𝐚𝐫 with cost segregation. This would allow him to claim 𝟏𝟎𝟎% 𝐛𝐨𝐧𝐮𝐬 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 on approx $𝟏𝟐𝟎,𝟎𝟎𝟎 𝐛𝐮𝐢𝐥𝐝𝐢𝐧𝐠 value in the first year itself after doing cost seg study. At a 37% tax rate, that creates tax savings of about $𝟒𝟒,𝟒𝟎𝟎. With this approach, the 𝐥𝐚𝐧𝐝 𝐛𝐚𝐬𝐢𝐬 ends up at $𝟏𝟖𝟓,𝟎𝟎𝟎 ($60,000 original land + $5,000 demolition + $120,000 old building that could not be fully depreciated), while the 𝐛𝐮𝐢𝐥𝐝𝐢𝐧𝐠 𝐛𝐚𝐬𝐢𝐬 is $𝟏𝟓𝟎,𝟎𝟎𝟎 for the new construction. Plus, he already claimed the $𝟏𝟐𝟎,𝟎𝟎𝟎 𝐛𝐨𝐧𝐮𝐬 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 in the first year. This simple timing strategy allowed Mr. A to 𝐜𝐚𝐩𝐭𝐮𝐫𝐞 𝐝𝐞𝐝𝐮𝐜𝐭𝐢𝐨𝐧𝐬 that otherwise would have been 𝐥𝐨𝐬𝐭, turning a potential tax trap into a big tax-saving opportunity. 𝐍𝐨𝐭𝐞: Always check with your tax advisor to see if this strategy works for your situation. #ustax #ustaxation #uscpa #cpa #learning #taxseason #cpafirm #cpafirms

We're building a $20M apartment building with $8M of investor equity. In Year 1, our investors are projected to receive over $5M in bonus depreciation, a paper loss equivalent to ~65% of their initial investment. Here's a quick playbook on how that works, and the "super-move" that can make those tax savings permanent. How Bonus Depreciation Works: Normally, you write off a building over 27.5 years. But through a Cost Segregation Study, we can identify parts of the asset with shorter lifespans (like appliances, flooring, and site work) and accelerate decades of deductions into Year 1. Who can use this loss? ➡️ Passive Investors: Can use the deduction to offset other passive income (e.g., from other rentals or partnership K-1s). ➡️ Real Estate Professionals (REPs): Can use the deduction to offset all income, including W-2 or active business income. (Any unused losses can be carried forward to future years.) The Catch: Depreciation Recapture That giant $5M deduction isn't a free lunch forever. When a property is sold, the IRS can "recapture" the depreciation you claimed and tax it at rates up to 25%. But there are two powerful ways to plan for this. The Solutions: Deferral vs. Elimination Path #1: The 1031 Exchange (The Deferral) You can sell the property and roll the proceeds into a new one. This defers both capital gains and the depreciation recapture tax. You're essentially kicking the can down the road. Path #2: The Opportunity Zone (The Elimination) This is the super-move. If the project is structured within an OZ fund from day one and held for 10+ years, our investors get: ✅ No capital gains tax on the sale. ✅ No depreciation recapture. The upfront $5M deduction becomes a permanent, tax-free benefit. This isn't theory—this is the exact structure we're using for our current $20M project. For the investors and CPAs here: When you're evaluating a deal, how much weight do you put on the after-tax benefits like bonus depreciation and its exit strategy?

There was a “catch” in the Big Beautiful Bill this summer. & it’s worth discussing. The “Big Beautiful Bill” this summer brought back the ability to deduct 100% of eligible property in the year it’s placed in service. But here’s the catch: 100% bonus depreciation only applies to assets with a depreciable life of 20 years or less. Apartment buildings themselves have a depreciable life of 27.5 years (39 years for commercial). That means you cannot take bonus depreciation on the whole building. Where the Opportunity Lies Through a cost segregation study, parts of a multifamily building can be reclassified into shorter-lived asset categories that do qualify for 100% bonus depreciation: • 5-Year Property: Appliances, carpets, furniture • 7-Year Property: Office equipment • 15-Year Property: Sidewalks, fences, landscaping, parking lots • Qualified Improvement Property (QIP):  ↳ Interior upgrades in nonresidential buildings Why This Matters for Investors 1. Bigger deductions in year one mean stronger cash flow. 2. Bonus depreciation can enhance your after-tax IRRs. So, when you hear an operator say “100% bonus depreciation is back,” it is worth being excited. Just know the benefit is in the components, not the entire building. Curious how this applies to our investment thesis? Let’s talk.

November rolls around and suddenly investors are blowing up my phone, scrambling for tax deductions. Yesterday I’m on a call with someone who needs a $100K write-off before year-end. He’s stressed. I suggest investing with a syndicator. He shuts it down immediately. So I ask, “Do you own any real estate already?” He says, “Yeah, I bought a $6M building six years ago.” I tell him, “Perfect. We’ll do a cost seg on that and you’ll get $800K+ in Year 1.” He’s stunned: “What?? I thought you can’t go back.” So many people don’t realize look-back cost seg studies exist. Yes, you can go back. You file Form 3115, take the catch-up depreciation you never claimed, and boom—deduction unlocked. Folks, take a look at the deductions you're potentially sitting on! #costsegregation #cre #taxes

Every December, I see the same thing happen. Investors scrambling to “get a cost seg done before year-end” thinking they’re about to miss their tax savings window. Here’s the truth most people don’t realize: You don’t need to complete a cost segregation study before December 31. The key is having your property placed in service before year-end. That simply means it’s ready to rent. For short-term rentals, you’ll need at least a couple of stays to qualify. Once that box is checked, you’re good. The study itself can be completed anytime before your tax filing deadline. So the rush isn’t about the report, it’s about the closing date. This time of year, smart investors are sending me properties under contract to run a free feasibility analysis. It shows them which deal gives the biggest deductions and how much they’ll actually save. Even if you bought years ago and never did a study, you can still catch up the missed depreciation using Form 3115 and the 481(a) adjustment. That’s found money sitting in your portfolio. At the end of the day, cost segregation isn’t just about tax deductions. It’s about freeing up capital, improving cash flow, and keeping more of what you earn. Want to see what your savings could look like? Let’s run the numbers.

Most RE operators are overpaying taxes because of one issue they never look at: Old assets still sitting on the depreciation schedule that don’t exist anymore. Every time you renovate—roof, flooring, appliances, HVAC, windows—you create a hidden tax opportunity. But you only get the benefit if you remove the original component from the books. Here’s what I see in about 90% of depreciation schedules: The old assets are still listed as if they’re “placed in service,” even though they were thrown in a dumpster years ago. And that creates two problems: 1️⃣ You’re depreciating assets you no longer own This inflates your asset basis and skews financials. 2️⃣ You miss the deduction from a partial asset disposition Under the repair regs, when you dispose of a component, you can deduct its remaining basis immediately. Operators leave thousands of dollars behind by not doing this. This is why a year-end depreciation schedule review matters. What to review with your CPA before 12/31: • What components were replaced this year? • Are the old components still listed on the depreciation schedule? • Can any of them be written off through a partial asset disposition? • Are the new components categorized correctly for bonus depreciation? If you need a CPA who actually understands these rules and can walk through your depreciation schedule with you, reach out. And follow here for more tax content for real estate operators and syndicators.

The Senate just passed the Big Beautiful Bill. Most real estate sponsors have no idea what’s inside it. But it might be the most aggressive tax reset for real estate in a decade. Here’s what changed: 100% bonus depreciation is back for 2025 and 2026. You can now fully expense improvements in year one. That means: • $80,000 in renovations? Deducted immediately • Roofs, HVACs, flooring? All count • Even if you financed it or raised investor capital Section 179 was expanded to $1.29 million. More assets now qualify, and you can still deduct even if it was debt-financed. Interest deductions go back to EBITDA. Higher leverage looks better on paper again. Opportunity Zones 2.0 is on the table. Early stage, rural-focused, and potentially powerful — but details are still vague. Here’s what this unlocks: • Faster depreciation and lower tax bills • Stronger cash flow and early investor distributions • More flexibility to front-load value-add work • The chance to offset active income through real estate if you materially participate This is real money, right now. And most operators are still using last year’s playbook. But there are risks: • The provisions expire after 2026 • The bill adds hundreds of billions to the deficit • Audit risk will rise as tax strategies get more aggressive This is the tax window. Learn it or miss it.

💄Investment Property Accounting (IAS 40.5) vs Tax (MD 173/2025) Property (land or building or part of a building) held by the owner or by the lessee as a right-of-use to earn rental income or for capital appreciation or both. (N.B! MD 173/2025 excludes land) NOT for: • Use in production or supply of goods/services (IAS 16) • Sale in ordinary course of business (IAS 2) 🧱 Examples of Investment Property • Land held for long-term capital appreciation. • A building leased out under an operating lease. • Vacant property held for future leasing. • Part of a building leased out (if separable from owner-occupied part). 🧮 Initial Recognition (IAS 40.20) Recognise when: 1. Probable that future economic benefits will flow to the entity. 2. Cost of the property can be reliably measured. • Initially measured at cost, including: • Purchase price • Directly attributable costs (legal fees, property transfer taxes, etc.) 🔁 Subsequent Measurement (IAS 40.30–56) 1. Fair Value Model (Most common under IFRS): • Remeasure investment property at fair value at each reporting date. • Changes in fair value → recognised in profit or loss. • No depreciation. 2. Cost Model (same as IAS 16): • Measure at cost less depreciation and impairment. • Fair value disclosure still required in notes. Note: Once chosen, the model must be applied consistently to all investment properties. 🇦🇪 Ministerial Decision No. 173 of 2025 – Tax Treatment For UAE Corporate Tax purposes: • Default Tax Treatment: No depreciation if fair value model used. • BUT Taxpayer can elect to deduct depreciation for tax only. ✅ Depreciation Election (Article 2, MD 173/2025) If taxpayer uses: • Accrual accounting, and • Realisation basis for gains/losses (Article 20(3) CT Law), ➡️ They can irrevocably elect to deduct depreciation for fair value properties. Deduction per year = lower of: • 4% of Original Cost, or • Tax Written Down Value (TWDV) Applies to all investment properties held at fair value. 📅 When to Make the Election? • In the tax return of the first relevant period. • If missed, cannot elect later. 📉 Disposal based on IAS 40 • Derecognise when sold or when no future benefits expected. • Gain/loss on disposal = difference between net disposal proceeds and carrying amount, recognised in profit or loss. 🔁 Transfers & Realisation Events MD 173/2025 • On realisation (sale, disposal, business cessation, or change to cost model), all prior depreciation must be added back to taxable income. • Intra-group or tax-neutral transfers: adjustments shift to transferee. • Anti-abuse rule: FTA can reject deductions if transfer lacks economic substance. 💡 Key Insight: While IAS 40 allows revaluation through profit/loss, the UAE tax system permits depreciation for investment properties held at fair value if elected properly, creating a difference between accounting profit and taxable income. Strategic tax planning is essential to avoid unexpected tax adjustments on disposal.