A thread on how real estate investors, developers and operators can make millions a year and pay almost nothing in TAXES by using depreciation, bonus depreciation, and 1031 exchanges.

A thread on how it works:
Depreciation is the act of slowly, over time, deducting the initial expense of an asset against your taxable income. Generally over a 27.5 (residential) or 39 (commercial) yr time frame. So each year you can write off 2-3.6% of the purchase price against your income.
Thats a big deal. We're buying a new property, a $3MM self storage facility. Thats a $60k a year write off against about $260k in NOI and 200k in cashflow on a $3MM deal.

It makes 30% of our cashflow tax free.

Very powerful but there is much more to it...
Different parts of the asset can be depreciated on different schedules.

We'll have a cost segregation study done to split up the depreciable lifespan of different parts of the building. The raw land can't be depreciated so you have to give that a value.
But other items can be depreciated on a quicker timeline. A roof, road, sidewalk, fencing, walls, gates, doors, latches, flooring, air conditioners, pavers, curbing, landscaping, etc.

The IRS has a depreciation schedule for each type. Some parts are 5 yrs. Others 15 years...
So you can depreciate a portion of the asset costs faster. Get the study done, get dollar amounts assigned to different parts and different schedules to front-load depreciation.

Now you can get 5 or 6% of the value as a deduction in the early years...

But wait... theres more.
Bonus depreciation allows you to deduct a certain percentage of cost in the first year an asset is put into service. Anything that is on a schedule of 15 years or less...

So the doors, sidewalks, HVAC, walls, latches, curbs, security, gates, etc.

A % of this stuff goes in Yr 1
For years 2015 through 2017, first-year bonus depreciation for these items was set at 50%. It was scheduled to go down to 40% in 2018 and 30% in 2019, 0% in 2020

But then Trump got elected and he enacted the Tax Cuts and Jobs act. Moving this percentage to 100% from 2017 to 2023
Its not uncommon to allocate 30% of an asset cost to items that can be depreciated on a 15 year or faster time frame.

So now 30% of your asset cost can be DEPRECIATED IN THE FIRST YEAR.

A note: Raw land can't be depreciated, so you need to put a value on that, too.
So back to our $3MM self storage facility we're buying in a few weeks.

The cost segregation study came back. 30% of the asset cost can be depreciated on a 15 yr or faster timeframe. This is 100% deductible THIS YEAR...
30% of $3MM is $900k.

A $900k tax deduction. In year 1.

The facility will produce about $260k in NOI and $200k in free cashflow after interest expense.

So while $200k goes into the bank account the tax LOSS is $700k.

But wait there is more...
The Cares act made it so you can carry those losses back 5 years to income made from 2015 onward. You can also use the new depreciation guidelines to CATCH UP assets purchased in the last 3 years.

You can also carry these losses forward into eternity.
The passive losses can't offset active income (W2 income, etc) but they can offset gains from other real estate properties or passive income.

On these new properties we won't have a tax liability for 4+ years because of Bonus Depreciation...
We'll also get a huge tax shield on cash we are now making from the facility we built in 2017.


This is how real estate owners, operators, developers make millions a year and pay 0 taxes.
There is a downside. If you sell your asset you have something called recapture. Your basis decreases in the asset as you depreciate it so you have more profits when you sell and thus a higher tax rate.

But if you've owned it longer than 12 months its taxed at capital gains...
Which (for now) is 15%-25% vs 30-40% for standard income in higher brackets.

And you can do whats called a "like-kind exchange" (1031 exchange) which allows you to use the proceeds to buy a new asset and shield the taxes and push them further down the line.
Me? I'll never sell this $3MM facility so I won't have recapture. Yes depreciation will run out over time but we'll use the proceeds to buy more facilities and thus getting more bonus depreciation and shielding more taxes.

Powerful stuff.
And if you like tweets like this and want to get them delivered to your email inbox, sign up for my newsletter here:

Another note:

This doesn’t only apply to commercial real estate.

I did a cost seg study on a second home I rent out as a short term rental.

You should probably cost seg your beach house. Or your single family rental.
I used @1245consulting to do 14 cost seg studies in 2020 and he’ll do 15 more this year.

Reach out. It’s not too late on properties you bought a few years ago!
This place is unreal 🤯

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Nick Huber

Nick Huber Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @sweatystartup

8 Jun
Closed on our first self storage property in the great state of Connecticut today!

A nice 26,845 square foot property in a market with strong rents and low supply.

That makes 11 properties and 340,000 square feet so far in 2021!
Also today - clear to close on a $4.2MM acquisition in western PA scheduled for 2 weeks.

Off market. 3 propertied. 90k SF.

$500k in seller financing in second position.

Released deal docs to our current LPs and oversubscribed $920k in 2 hours with backup offers.
The best part - my CFO (hired 2 mo ago) completed the raise from start to finish without my help.

And he didn’t have to take a meeting because of our software Juniper Square.
Read 7 tweets
7 Jun
Friendly reminder:

I do consulting if you’re looking at a self storage deal.

Just got a note today from a guy who has purchased 4 properties and quit his job since our consulting call.

Said he spent 3 hours this morning on a mountain bike.

Love to see it.
Don’t hire me until you have a live deal you want to put an offer in on.

If you’re an individual looking to get started I recommend:

Looking for a facility under 15-20k square feet. Big players don’t even look at them so it’s where the deals are.

Use google maps to measure.
Make sure you have at least 40% of the purchase price in cash (or partners who can help you fund it) - banks will finance 65-70% of your all-in costs.
Read 8 tweets
6 Jun
How to get rich without getting lucky:

Find a way to make $100 an hour doing something simple IN YOUR TOWN.

Do it until you have $10k+ in the bank and you’re too busy to sell new customers.

Hire employee for $25 / hr to do what you do so you can sell new customers.

Be willing to work and sweat and even maybe scrub toilets for 3-6 months.

Look at the market unemotionally. It’s not about you and what you love doing.

Don’t try to reinvent the wheel. Look at competition as a sign there is money to be made.
Compete with folks who run their business like its 1985 with secretaries, yellow pages, and cash.

Wrap in technology. Never take cash. Outsource accounting and get software for all other admin.

Turn quotes in 10 mins or less without site visits.

Book in 30 secs or less.
Read 14 tweets
6 Jun
Next time entrepreneurship doesnt seem attainable remember how many successful business owners aren’t really that smart at all.
The problem:

A certain subset of entrepreneurs are brilliant. Money behind them. Top of the top.

And everybody makes the choice to compete with them.
The solution:

Look at all the companies in your town doing business like it’s 1985 who make a shit load of money.

Go compete with them.
Read 4 tweets
1 Jun
Over the last 10 months my partner and I have:

Sourced, financed, and acquired $21MM worth of self storage (439,557 square feet, 13 properties) and raised $6.3MM in investor capital.

And now we operate it with our team of 14.

A thread on what I've learned:
Real estate can be over-complicated to that point that its unapproachable.

When we built our first building back in 2017 we didn't know how cap rates were calculated or what a debt yield was.

We had a basic spreadsheet and a gut feeling we could out-operate the other players.
The lesson:

Get the big things right.

For us it was:

Asset class / market selection
Lease up / revenue projections

It turns out we were right and it worked.
Read 16 tweets
31 May
Learning in public comes with its fair share of "discomfort."

But putting your strong opinions out there is a great way to learn a lot really fast. Just make sure to hold-on loosely.

A thread on 10 big thing's I've changed my mind on in the past 6 months:
#1. Being an entrepreneur isn't the best path for everyone

I've met more and more entrepreneurs who are stuck, tied down, desperate and devastated (if they fail)

Now I believe a rewarding career with work-life balance is often a way better life than most founders lead.
#2. Tech startups are just getting started

Talk to me 12 months ago and I thought tech was matured and the opportunities were few and far between.

Now I know software engineers are STILL in short supply and tech startups will continue to thrive.
Read 11 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!