Tax tips and tax help to assist taxpayers by outlining options for tax reductions and tax breaks through statutory tax deductions. Income taxes are too high. However, real estate investors have found many options to reduce the level of federal income taxes. Congress has provided a number of income tax benefits for real estate investment. These include depreciation, cost segregation, tax-free exchanges (1031 exchanges), casualty losses, and capital gains treatment. Real estate investors who use these income tax benefits can reduce or even eliminate federal income taxes. The tax reduction reduces the risk that real estate investors bear since they have more liquid capital.
Income taxes are calculated on the basis of taxable income. Taxable income is calculated by deducting allowable expenses from income/income. The amount of income for real estate investors is generally a fixed number. There may be modest variations between the cash basis and the accumulation basis. However, it is usually difficult to materially change the level of income. However, there are many judgment options in calculating expenses. These include whether or not to capitalize repairs, the level of debt and interest, and depreciation. The resulting tax reduction can be substantial.
Depreciation is a noncash expense that increases total expenses and reduces taxable income. Real estate depreciation is based on the concept that improvements to land physically deteriorate over time. Real estate owners may depreciate a portion of the cost basis to account for this physical depreciation. (Actually, the market value of improvements generally increases in value over five or 10 years, even though depreciation is recorded for accounting purposes.)
Real estate depreciation defers and reduces federal income taxes. Depreciation defers income taxes from the time the income is earned until the property is sold or a gain on the property is recognized. (Real estate investors can defer gain recognition on the sale of the property using a 1031 exchange.) Depreciation reduces federal income taxes by converting the income character from ordinary income to capital gains income. The maximum income tax rate for ordinary income is 35%, while the maximum income tax rate for capital gains income is 15%. Although some depreciation is recovered at a 25% rate, much of the depreciation-protected income can be recovered at a 15% rate. Furthermore, even if depreciation simply lowers the tax rate from 35% to 25% and defers paying taxes for a period of years, the savings are significant.
Cost segregation is a specialized service used by real estate investors to maximize depreciation. Cost segregation is usually done by real estate appraisers or engineers to adjust the real estate depreciation schedule. Cost segregation identifies and quantifies up to 130 components that qualify for short-term depreciation. The building structure depreciates over 27.5 years (residential rental property) or 39 years (commercial property). Short-lived property typically depreciates over 5, 7, or 15 years. Obtaining a cost segregation report often allows real estate investors to allocate 20-40% of the cost base to short-term depreciation. Shifting a significant portion of the cost base from long-duration components to short-duration components can increase depreciation by 50% to 100% during the first five to seven years of ownership.
Depreciation is a powerful income tax reduction tool available specifically to real estate investors. Real estate investors can increase depreciation benefits by using cost segregation.
Cost segregation produces tax deductions and reduces federal income taxes across the country and in markets of all sizes. Below are just a few examples of where cost segregation leads to significant tax deductions.
Town:
- New York, NY
- Bridgeport, CT
- Hartford, CT
- San Francisco, CA
- Memphis, TN
- Boston, Massachusetts
- Los Angeles California
- Baltimore, MD
- Orlando, Florida
- Denver, Colo.
- Birmingham, Alabama
- Sacramento, Calif.
- Honolulu, Hello
- Bakersfield, CA
- Lakeland, Florida
- Dayton, Ohio
- Milwaukee, WI
- Santa Rosa, Calif.
- Portland, Oregon
- Jacksonville, Tennessee
- Colorado Springs, Colorado
- Fresno, Calif.
- Greenville, South Carolina
- Worcester, Massachusetts
- Richmond, VA
- austin, texas
- Louisville, Kentucky
- Albuquerque, New Mexico
- Springfield, Mass.
- Syracuse, New York
Cost segregation produces tax deductions for virtually all types of property. Kind of property:
- Investigation and development
- Automatic salvage yard
- manufacturing/processing
- used car lot
- cinema
- nightclub
- Motel
- truck stop
- commercial building
- Greenhouse
Almost all industries, including the following, can generate profitable tax deductions through cost segregation.
Industry:
- Golf courses and country clubs
- Building Supply Distributors
- truck transport
- printing activities
- editors
- chemical manufacturing
- storage and storage
- manufacture of mineral products
- food manufacturing
- Computer and electronics manufacturing