Boomers — Have Your Cake and Eat (most of it) Too

Federal Reserve data now estimates 51.1% of all U.S. household wealth to be controlled by the Baby Boomer generation (ages 62-80 years old). The aggregate of their real estate holdings, equities, bonds and private businesses totals $85.41T. That figure will grow further through a $20.18T inheritance from the Silent Generation over the next decade.

Much of that wealth sits in commercial real estate. While only a small minority of the Boomer cohort directly own income-producing properties beyond their primary residences, those owners command a disproportionate share of privately held commercial assets. Retail centers, warehouses, office buildings, net lease and legacy multifamily properties comprise portfolios built over decades, acquired or inherited at a much lower basis than current market prices.

The US Census pegs the current median age of baby boomers at 71 years old. Actuarial data suggests most of their generation will live another 14-16 years, with many likely living into their late 80s or beyond. Age bestows wisdom, wisdom gives clarity. Why spend precious time in retirement mulling over the headaches of tenant rollover, capital expenditures, refinancing risk and vendor management?

Selling assets outright rarely solves those challenges. Capital gains taxes, net investment income tax and depreciation recapture drastically erode sale proceeds. More importantly, replacing income from legacy properties often requires assuming higher leverage, increasing operational burdens and taking on greater risk – all unacceptable trade-offs at this stage of life.

Although 1031 exchanges afford owners the ability to defer taxes by trading out of higher-risk assets, the ideal replacement properties featuring longer-term leases with limited landlord responsibilities sell at lower cap rates, offering lower income. In prior cycles, such trades forced material concessions in cash flow – enter 100% bonus depreciation.

The tax law changes codified by the Big Beautiful Bill represent a sea change in portfolio construction and estate planning for Baby Boomers. The permanent reinstatement of 100% bonus depreciation allows owners of newly acquired qualifying property to immediately expense certain components identified through cost segregation studies. While depreciation has always enhanced real estate investing, the ability to fully expense qualifying components materially shifts after-tax income in the early years of ownership.

This does not increase NOI but instead transforms after-tax outcomes. Investors who exchange into safer, lower-yielding assets can now preserve or improve after-tax cash flow once bonus depreciation shelters the income that would otherwise face full marginal-rate taxation.

Consider a hypothetical scenario: aging Boomer siblings own and manage a retail center they acquired in the early 2000s now worth $20M. They recognize the folly in paying steep taxes in capital gains and depreciation recapture but grow weary from juggling 20+ tenants on short-term leases. How are others in their position leveraging the new tax code to move toward a more conservative asset allocation? How can they maintain the after-tax income that supports their lifestyles?

Combining a 1031 exchange with bonus depreciation on the replacement property will allow them to buy their time back without sacrificing after-tax cash flow. They trade the headaches of CAM recs, management calls, leasing updates, etc. for the peace of mind from a long-term lease backed by corporate credit. These Boomers now enjoy the luxury of choosing how long to stretch their bonus depreciation against their property-level income to maximize their after-tax cash flow. Count yourself a healthy and sprightly Boomer? Stretch the bonus depreciation over 15 years. Never quit smoking and love red meat? Reap the bonus depreciation over three years and go race speed boats. The stability or even growth of the after-tax income supports greater lifestyle flexibility all while optimizing estate planning.