How private equity is changing housing

What is this special depreciation corporate owners get? IIUC any landlord can use depreciation to lower their tax bill. Wouldn't the depreciation from a new purchase also apply to the rents from that new purchase?

Somewhat more outrageous is the 1031 exchange. Sell VTI at a profit to buy VOO and the government hits you with a capital gains tax. Sell your primary residence for $250k more than you bought it - same thing. But landlords are a special, privileged investor class to whom these rules don't apply. They can sell a house and pay no taxes on gains as long as they buy another property.

It's not special, just requires scale for it to make sense. E.g. Cost segregation studies and UPREIT transactions are cheaper on a neighborhood level. And you need enough passive income to absorb the depreciation losses

^ This

And the scale applies at every single step of the process. A citizen homebuyer is playing a oneshot game. There are few discounts to be had and every single fee is its own battle.

A corporation/PE is playing a multi-shot game. There are bulk discounts, relationships, and scale that is applied to everything from title insurance and inspections to cost segregations to filing all of the paperwork.

> IIUC any landlord can use depreciation to lower their tax bill.

This is also not really how depreciation works for assets that retain their value. If you buy a building to rent it out, the cost of the building essentially a cost of doing business, i.e. a tax deduction. You pay tax on the profit which is revenue (rents) minus costs (building, interest, maintenance, advertising, etc.) Depreciation is the building, they make you take it over time instead of all at once when you buy it.

But the depreciation lowers the book value of the building, which is your tax basis when you sell it. If you buy a building for a million dollars, depreciate it down to $500,000 and then sell it for $2M, you have a $1.5M capital gain from the sale. You basically have to give back all the depreciation unless the building actually lost that much value by the time you sold it, and in practice it usually goes up instead of down.

It's really the homeowners who have the advantage here because there is a large capital gains tax exemption from the sale of your primary residence, and that's actually a reduction in taxes instead of just a deferral.

You can only deduct passive income losses for depreciation if you aren’t a real estate professional of up to $25000 and that’s only if you earn less than $100K. It starts phasing out between $100K and $150K

> They can sell a house and pay no taxes on gains as long as they buy another property.

As long as they buy another property at least as expensive or more, within a certain time period.

And it's not that they don't pay taxes, it's that the cost basis gets reset. That is the benefit.

> There are few discounts to be had and every single fee is its own battle.

Also if you take a 10% gamble on a strategy to save 50k and it backfires and lands you with a 500k legal bill, that's just the cost of business to a big (or even not that big) company, but it'd be absolutely ruinous to private individuals.

Depreciation is mandatory, your cost basis declines while inflation slowly pushes up the value, which leads to a type of phantom gain. There are abilities for individuals to lower their tax bill as there are breaks. But for a Mom & Pop small landlord the tax situation can be tough. 1031 exchanges are tricky for small investors as you have to exchange into a situation with the same mortgage. A big real estate corp can borrow against their total equity, rather than taking a mortgage on the new property. So they can roll their equity into the new deal tax free. This is especially lucurative to buying cheap, rennovating and then selling to another corp. And what isn't discussed is there is a huge amount of "carried interest" deferred profits. That tax break was intended for high risk venture capital investments but in the 80s and 90s it became used for speculative and even day trading. https://www.pgpf.org/article/what-is-the-carried-interest-lo...

It's true depreciation reduces your cost basis and creates a higher capital gain. But the gain can be rolled into another property with a 1031 exchange, deferring taxes. I already said this in the comment you responded to.

Homeowners get a tax exemption but only up to a certain amount in gains.

> But the gain can be rolled into another property with a 1031 exchange, deferring taxes. I already said this in the comment you responded to.

They can also keep the property forever and continue renting it out, and then never realize the gain. But in both cases that means they don't get to realize the gain -- or even recover their original principal -- except insofar as they're renting it out, and the rent is taxable income.