In the real estate investment world, car washes are emerging as a hidden gem among tax-smart real estate investors.
Along with the potential for monthly cash flow and appreciation, car washes also offer the opportunity for accelerated depreciation, a powerful tool for investors looking to offset passive income.
Many high-net-worth investors are seeking tax-advantaged investments that can help them offset and reduce income taxes. A car wash investment could be the tax-friendly opportunity they've been seeking.
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Before diving into accelerated depreciation, let’s start with the basics of depreciation itself. In real estate investing, depreciation allows property owners to deduct a portion of a property’s cost basis from their taxable income each year—even though real estate often appreciates in market value over time.
Depreciation means that these physical components lose value over time due to wear and tear, making them eligible for tax write-offs over their useful life. Real estate investors typically spread depreciation over 27½ years for residential properties and 39 years for commercial properties.
Understanding bonus depreciation and the TCJA
The Tax Cuts and Jobs Act of 2017 (TCJA) re-introduced an accelerated version of depreciation known as bonus depreciation. In many instances, the TCJA allows investors to immediately deduct the full depreciable cost of a qualifying property in the year it is placed into service instead of depreciating the asset over the traditional longer timelines.
Investors should be aware, however, that bonus depreciation began to be phased out by 20% each year beginning in 2023. These reductions mean that investors can claim a one-year write-off of 60% of any qualified investment in 2025 and 40% in 2026.
Even with the phasing-out process, investors are finding the tax advantages of car wash investments to be an incredibly powerful tax-savings tool when combined with a cost segregation study.
A cost segregation study breaks the qualifying asset down to its individual components and identifies which ones qualify for shorter depreciation schedules.
For instance, in a car wash investment, equipment such as washing machines, vacuums and water treatment systems will most likely qualify for a short depreciation period, allowing for more rapid deductions than the building itself.
Why car washes combine cash flow and tax efficiency
The IRS may classify a car wash as 100% eligible for bonus depreciation benefits because everything used for a car wash requires substantial investment in specialized equipment and infrastructure.
Items like conveyor belts, vacuums and water-recycling systems may all be eligible for bonus depreciation. By taking advantage of the bonus depreciation strategy, car wash investors can write off a large portion of their initial investment as a tax deduction.
Car washes are also known for their generous cash flow potential due to their low operational overhead and steady customer demand. Combining this with the tax savings from bonus and accelerated depreciation creates a potentially rewarding and tax-efficient investment.
Another interesting aspect about car wash assets is that in many cases they use standardized systems and components. This allows investors to create scalability within a portfolio, seamlessly replicating washing equipment, water-recycling systems and even overall layouts across multiple sites.
The ability to easily replicate the car wash model provides investors with a unique advantage. Each time a new property is placed into service, investors can conduct a cost segregation study and apply bonus depreciation to qualifying components, just as they did with their initial car wash investment.
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This scalability ensures investors benefit from ongoing tax advantages as their portfolio grows. With each new car wash investment, they may be able to deduct a significant portion of the property’s depreciable cost and generate substantial tax deductions in later years.
Additional tax savings are possible as the investor adds more properties to their portfolio, leading to a more efficient, profitable investment strategy.
This scalability potential can particularly appeal to high-net-worth investors who want to offset passive income.
By combining cash flow with significant tax savings, car washes stand out as an asset class that can potentially offer immediate and long-term benefits for investors looking to increase their investment returns.
Buying a single car wash vs car wash real estate funds
Many investors take advantage of car washes for their potential generous tax advantages by purchasing a single car wash themselves. This, however, would require an investment of $1.5 million to $6 million. Other investors have found car wash investment real estate funds to be a much better way to access these tax advantages.
In a car wash real estate fund, an investor will typically invest anywhere from $50,000 to $500,000 into the fund. The fund then will own three to 25 car washes. This provides a level of diversification for investors while also providing them with the tax advantages of a car wash asset, but all with a much lower buy-in.
Our clients at Kay Properties have been accessing these types of tax-advantaged real estate funds through the www.kpi1031.com platform for nearly two decades.
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