Tax deductions are not the top priority for most individual real estate investors. They often work out of their home with no employees,
other than those on-site at the property. Challenges (aside from
tax deductions) include selecting what property to purchase, screening tenants, repairs, managing expenses, obtaining financing, and deciding when to sell. This articles addresses
tax deductions sometimes over-looked by real estate owners.
Tax deductions reduce taxable income but do not directly reduce taxes. For example, $10,000 in additional tax deductions will generate $3,500 in federal income tax savings ($10,000 X 35%), assuming a 35% federal income tax rate. Since most
tax deductions require a cash expenditure, increasing actual expenses to increase
tax deductions is not desirable. Let’s review fine-tuning the depreciation schedule and reclassifying existing expenditures to increase
tax deductions. Real estate depreciation is a potent but underutilized source of tax deductions. Real estate depreciation schedules are commonly established by just separating land from the improvements. This is analogous to asking a world-class pianist to play a piano which is not tuned and has several keys which are not functioning. The results are just not as good as they should be. Congress has provided depreciation as a tax deduction to encourage real estate ownership and investment. Numerous court decisions have provided clear guidance for accurately and precisely depreciating real estate. Cost segregation can typically increase real estate depreciation by 50-100% in the first 5-7 years of ownership. Owners can claim a tax deduction windfall for properties owned more than one year by “catching-up” previously under-reported depreciation. After obtaining a cost segregation report, you can “catch-up” depreciation without filing any amended tax returns. Another meaningful source of tax deductions is to scrutinize any cash expenditures which are being capitalized. Have minor repairs been capitalized in error? Are there more significant repairs which do not clearly extend the life of a component? Discussing these items with your accountant can yield additional tax deductions. Also review items which were capitalized in prior years; can you claim any of them as current year tax deductions? Child labor can be good when they are your children and you claim a tax deduction. Consult your accountant or CPA but this can generate additional tax deductions of $5,000 per child, upon which they pay no taxes. (If they are feeling generous, they may return the money as a tax-free gift.) A tax-deductible vacation is an attractive option to make an expenditure deductible. Simply plan a vacation around a business trip for a meeting or seminar. Your airfare and hotel for the business period are deductible. Hotel before or after the business activity and your spouse’s airfare (assuming that your spouse is not involved in business) are not deductible. Half of meals during period with business activity are deductible. Reviewing personal expenditures can generate additional tax deductions. Items used for business such as computer, printer, office supplies, seminars, association dues, and business publications can be deducted. Long distance business phone calls can also be deducted. Self-employed persons can deduct the entire cost of health insurance premiums. Record keeping for tax deductions does take a modest effort. However, the federal income tax savings make it worth the effort. Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of cities where cost segregation generates meaningful tax deductions.
City:
- Las Vegas, NV
- Boston, MA
- Tampa, FL
- Hartford, CT
- San Francisco, CA
- Memphis, TN
- Miami, FL
- Denver, CO
- Phoenix, AZ
- Orlando, FL
- Boise, ID
- Chicago, IL
- El Paso, TX
- Oxnard, CA
- Rochester, NY
- Cincinnati, OH
- Jackson, MS
- San Jose, CA
- Fresno, CA
- Charleston, SC
- Omaha, NE
- Oklahoma City, OK
- Buffalo, NY
- Albuquerque, NM
- San Antonio, TX
- Charlotte, NC
- Allentown, PA
- Austin, TX
- Baton Rouge, LA
- Jacksonville, TN
Cost segregation produces tax deductions for virtually all property types, including the following:
Property Type:
- Used car lot
- Research and development
- Nursing home
- Lumber storage
- Truck stop
- Tennis club
- Hospital
- School
- Movie theatre
- Lodging
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Golf courses and country clubs
- Textile product mills
- Nondurable good wholesalers
- Durable good wholesalers
- Real estate lesser
- Electrical component manufacturing
- Textile mills
- Laundry facilities
- Automotive parts distributors
- Plastic and rubber products manufacturing
Timely preparing appraisals requires skilled and experienced appraisers and access to relevant data. O'Connor appraisers have an average of 8 years experience and have access to the most comprehensive Texas rent and sales comparable database. O'Connor has built these databases over a 20 year period.
