Understanding the Section 179 Deduction: A Key Strategy for Real Estate Tax Planning

For real estate investors and business owners, understanding the IRS Section 179 Election to Expense Depreciable Assets is crucial to making the most of your tax strategy. This provision allows taxpayers to expense certain qualifying assets upfront instead of depreciating them over a period of years. In essence, it offers immediate tax savings by deducting the cost of eligible business property in the same year that it is placed in service.

However, there are several factors to consider when using this tax tool. Let’s break down how it works, what kinds of assets qualify, and why decisions regarding the election of Section 179 deductions should always be left to your CPA.

What Is Section 179?

Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and software up to an annual limit. In 2024, for example, taxpayers can expense up to $1,220,000 of qualified assets. This election can apply to many types of tangible personal property, such as machinery, equipment, and off-the-shelf software, which are used predominantly in your business.

One of the significant benefits of Section 179 is the opportunity to fully expense these assets in the year they are placed in service, instead of capitalizing them and taking smaller deductions over their useful lives through depreciation.

Limits on Section 179 Expensing

As attractive as Section 179 may seem, there are limits. For tax year 2024, the maximum investment limit is set at $3,050,000. If your business places more than this amount in service, the amount you can expense is reduced dollar-for-dollar over this threshold. In addition to the dollar and investment limits, the amount of your Section 179 deduction cannot exceed your taxable business income for the year.

This means that even if your business invests heavily in qualified property, the deduction could be limited by the business’s profitability.

Qualifying Property

Not all property qualifies for Section 179. While most tangible personal property, such as office furniture, computers, and vehicles, are eligible, certain assets are excluded. Real property, like buildings and structural components, generally does not qualify unless it is "qualified improvement property."

Examples of qualified improvement property include improvements made to the interior of nonresidential real property, such as HVAC systems or alarm and security systems.

Why RE Cost Seg Does Not Include 179 Election Recommendations in Our Studies

At RE Cost Seg, we focus on delivering detailed, high-quality cost segregation studies that maximize your tax savings. While we provide you with a comprehensive breakdown of your assets, including placed-in-service dates, basis, and recovery periods, we refrain from making specific recommendations about Section 179 expensing.

However, we supply a comprehensive breakdown of all assets, including their basis, placed-in-service dates, and recovery periods. This information makes it easier to identify eligible 1245 property that could be considered for Section 179 expensing.

We refrain from making direct recommendations on Section 179 because we believe this decision is best made by the CPA, who completely understands the client’s overall tax situation. This includes factors such as the client’s investment limits and any other Section 179 elections, which we may not be aware of since our review focuses on a single property.

The decision to elect Section 179 is deeply tied to broader tax implications, including other deductions, income limitations, and future business planning. Your CPA has a holistic view of your finances and can help you make the right choice.

Key Takeaways

1. Section 179 is a powerful tool for business owners and real estate investors, allowing immediate expensing of qualifying assets in the year they are placed in service.
2. Annual limits apply to how much can be expensed, with the 2024 cap set at $1,220,000, and investment limits that start to phase out when more than $3,050,000 of property is placed in service.
3. Not all property qualifies for Section 179. Typically, tangible personal property qualifies, but real property does not unless it meets the definition of qualified improvement property.
4. The importance of consulting a CPA—The Section 179 election can be a valuable tax strategy, but it’s also complex and should be made in the context of your entire tax picture. Your CPA is the best resource for guiding you through this decision.

At RE Cost Seg, we aim to provide the data you need to optimize your tax planning, without making assumptions about your overall tax strategy. We believe your CPA, armed with our detailed asset breakdown, can help you make the best decision when it comes to electing Section 179 expensing.

Final Thoughts

Leveraging the Section 179 deduction can provide significant tax savings in the right circumstances. With proper guidance from your CPA, and the detailed asset information provided by our cost segregation studies, you can make informed decisions to optimize your tax benefits while maintaining compliance with tax regulations. Reach out to us today to see how a cost segregation study can benefit your real estate investments.

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