Does owning rental property help with taxes?
In a word, yes! There are many ways to save on taxes, but owning rental property will definitely do so. Here are 3 categories where owning rental property will help.
Accelerated depreciation uses the Modified Accelerated Cost Recovery System (MACRS) method of depreciation. This allows the taxpayer to establish shorter depreciation periods for qualifying assets. In order to do so properly, this requires an engineering based cost segregation study. The IRS states, "...Cost Segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated." This statement from the IRS is very clear. The accounting profession of all stripes is unqualified to apply cost segregation...no disrespect intended, but the facts are clear. As a taxpayer, it is incumbent upon you to do your own due diligence. Confirm this information yourself. Check out the IRS website for cost segregation.
This is a lengthy list, including but not limited to, operation expenses, loan interest, payroll taxes, property repairs, and on and on.
Proper Planning & Strategy
It is vitally imperative that one always seeks professional help when seeking ways to save on taxes. Tax attorneys, CPAs/accountants, Estate Planners, and those who directly work with assets affected by taxes. Those would include cost segregation professionals trained in, and fully knowledgeable of, income and property taxes, and how they impact the taxpayer.
Questions or comments? Contact us at firstname.lastname@example.org.
Source 1: Does Owning Rental Property Help With Taxes?
How does owning Rental Property affect taxes?
>Many people own rental property. Residential rental property includes a single-family house, duplex, triplex, quad-plex, and, of course, apartments of all sizes. Rental property can also include commercial property. This can include all types of properties such as office building, retail, warehouse, and more.
If you already own property, then you know real estate is generally considered a long-term investment, since liquidity is not always an option. Income-producing rental property receives certain favorable as well as unfavorable tax treatment.
Rental properties typically appreciate in value. Rental property under ideal circumstances generates positive cash flow. This means you make more in rent than you pay out in expenses! Believe it or not there are plenty who own rental property who don't get that basic concept. There are other deductions like mortgage interest and property taxes. There is also insurance, utilities, supplies, and associated fees. Then there are "soft" costs like attorney's, CPA's, and property management fees.
One major rental property tax advantage is cost segregation. This is a strategy rarely used though IRS required. It is the only Internal Revenue Code rarely enforced. The simple reason is that cost segregation, when properly applied with the engineering expertise, reduces income taxes very significantly. How significantly? The typical residential rental property saves about $8,000 in taxes on a $100,000 investment. Commercial rental property is just as good, sometimes better.
Additionally, cost segregation has other benefits. For example, it reduces property taxes, some sales & use taxes, and better borrowing leverage. Lenders view the reduced taxes as additional "debt-service coverage." This allows for a reduction in interest rate or down payment requirements or lower capital reserves. These are all great to know when buying or building a rental property.
Remember that rental property typically appreciates in value? Recent history tells us that doesn't always happen. It can "depreciate" in value. So, obviously, conversely from above, you could have negative cash flow. You aren't making enough to cover your expenses.
Then you have what is called "passive loss limitations." This affects many, if not most, rental property owners. If you have a "job" and your rental property is an "investment" then you are limited to your ability to write-off losses if you have any. Henssler Financial shares this in an article titled "Tax Advantages and Disadvantages of owning Rental Properties."
Always Consult Tax Advisor
When buying or selling rental property, it is smart to consult with your tax advisor. Whether this is your CPA or tax attorney or cost segregation engineer, you should always do so.
What are the new tangible property regulations?
Many of you know, and just as many don't know, there are new tangible property regulations. The IRS has been working on these tangible property regulations over 4 years. They were finalized and enacted last January, 2014, just to be rescinded last fall. In effect, the accounting community raised he** with the IRS claiming "financial Armageddon" was coming if the law were actually applied. Go figure.
So, implementing these new tangible property regulations has become a chore. Just ask your CPA or accountant! The better question to ask is, "how can I use these tangible property regulations to my advantage?" Let's look at just a few areas...
Do the tangible property regulations apply to you?
When & how do you apply the final tangible property regulations?
Generally, the final tangible property regulations apply to taxable years beginning on or after January 1, 2014, or in certain circumstances, apply to costs paid or incurred in taxable years beginning on or after January 1, 2014. To make these elections, you should attach a statement for each election to your timely filed original federal tax return including any extension for the taxable year in which the amounts subject to the election are paid. Each statement should include your name, address, Taxpayer Identification Number, and a statement describing the election. For some elections, you will need to include a description of the property to which the election is applied. For example, if you qualify and desire to use the de minimis safe harbor election for qualifying amounts paid during your annual taxable year beginning January 1, 2014, you must file a statement with your timely filed original federal tax return for 2014.
When and how do you change a method of accounting to use the final regulations?
Generally, you receive automatic consent to change a method of accounting by completing and filing Form 3115, Application for Change in Accounting Method, and including it with your timely filed original federal tax return for the year of change. You also mail a duplicate copy of the Form 3115 to Ogden, Utah. The Form 3115 will identify the taxpayer, describe the methods that are being changed, identify the type of property involved in the change, and include a section 481(a) adjustment, if applicable. When cost segregation is applied, per IRS guidelines, this allows for all overpaid income taxes to carry forward into the current tax year automatically.
The section 481(a) adjustment takes into account how you treated certain expenditures in years before the effective date of the final regulations to avoid duplication or omission of amounts in your taxable income. For detailed instructions for filing applications for changes in methods of accounting under the tangible property regulations, see Rev. Proc. 2015-13, 2015-5 I.R.B. 419, and sections 6.37-6.40 and 10.11 of Rev. Proc. 2015-14, 2015-5 I.R.B. 450.
So, what should I do now?
Simply! Contact us here at Segregation Holding. We partner with CPAs to deliver the necessary engineering analysis for your CPA to apply to your taxes. Your tax credit or refund is just 30 days away from when we file Form 3115. Act today...don't delay...it's your money! By the way, your money is guaranteed to you by law. Segregation Holding commits to help you get it!
What is Depreciation Recapture?
When a taxpayer purchases a tax-deductible asset for use over several years, the taxpayer can deduct a percentage of the asset’s value from his or her yearly taxable income over the life of the asset. (See IRC §§ 167, 168 and the IRS tables of class lives and recovery periods). The Internal Revenue Service publishes specific depreciation schedules for different classes of assets. These schedules tell a taxpayer what percentage of an asset’s value may be deducted each year and the number of years in which the deductions may be taken. The values of these deductions are used to determine the asset’s recomputed basis at the time the taxpayer sells the asset. (See IRC § 1245(a)(2)(A)).
Source: Internal Revenue Service
IRC Section 1245 Definition:
A portion of the Internal Revenue Code states that depreciable property that has been sold at a price in excess of it's depreciated or salvage value may qualify for favorable capital-gains tax treatment.To find out more, go to...
What is accelerated depreciation?
Well, in layman's terms, it is the depreciation of fixed assets at a faster rate early in their useful lives. Accelerated depreciation reduces the amount of taxable income in the early stages of asset life. The result is, tax liabilities are deferred. The net effect of accelerated depreciation is the company pays more taxes in later years. Time-value of money proves our dollar is worth more today than tomorrow.
Are there different methods of accelerated depreciation?
There are several calculations available for accelerated depreciation. One is the double-declining balance method...another is the sum of the year digits method. For our purposes, we will discuss the double-declining balance method of accelerated depreciation. This method of accelerated depreciation is applied when cost segregation has been employed to allocate building components according to the Internal Revenue Code. Accelerated depreciation, using this double-declining balance method, is applied under Modified Accelerated Cost Recovery System (aka, MACRS). MACRS uses 5 basic depreciable periods (5, 7, 15, 27.5, & 39.5 years) as applied to building components. Under special circumstances, these periods can vary. For example, in Oklahoma, much of the state is designated as Qualified Indian Reservation Property. As a result, these depreciable periods change to 3, 5, 9, 20, and 22 years.
What does accelerated depreciation do for me?
Simple. Accelerated depreciation does these things:
Does applying accelerated depreciation make sense for me?
CPA is ecstatic with cost segregation results for her office!
After providing the CPAs with our free benchmark estimate, our analysis showed about $20,000 in federal income tax credit. The results of our study provided them with almost $24,000, a 20% increase in benefits...wow! That gave them a 600% return on investment!
Cost segregation is the term coined by the IRS when applying MACRS depreciation to building components. MACRS is an acronym for Modified Accelerated Cost Recovery System. This is the method of depreciation all commercial property is supposed to use. However, 95% of commercial real estate is set up on the 39.5 year straight line method. Why? This is a good question considering the IRS requires MACRS when contemporaneous records are available.
We are a pure engineering firm that partners with accounting firms. We partner with CPAs and accountants to give their CRE clients huge income tax refunds.
Listen, if a CPA believes in cost segregation enough to apply it to their own building, doesn't that tell you it's something you should apply?
For a free estimate of benefits, go to www.GetYourTaxRefund.us and complete the brief questionnaire. Let the real numbers decide if it makes sense.
Cost segregation and the IRS are likened to your hand fitting into your glove...snugly.
Cost segregation actually came about as a result of Hospital Corporation of America suing the IRS...and winning! The Supreme Court of the United States heard arguments from opposing counsel and ruled that there are building components qualifying for shorter depreciation periods...5-years, 7-years and 15-years. This is simple mathematics. Time-value of money says that a dollar is worth more today than it is tomorrow.
Segregation Holding is a forensic engineering firm that applies all of the Internal Revenue Code to the advantage of the commercial property owner. Specifically, we use IRC § 481(a), the "catch-up" provision. This little section of the tax code allows us to give any commercial property owner a windfall tax refund. Without amending a single tax return, we can go back to January 1, 1987 and get your overpaid taxes paid to you in the current tax year. The IRS grants what is called "automatic consent." For you, the taxpaying property owner, it means the IRS gives you all of those overpaid taxes simply by filing Form 3115. Segregation Holding provides that form as part of our deliverable at no additional charge.
So, if you own or lease commercial real estate of any kind, we can help. Our team of forensic engineers are highly trained in building componentization and applying the tax code to those components.
Feel free to contact us today through our website at www.SegregationHolding.com or you can request a free estimate of benefits by completing our client questionnaire at www.GetYourTaxRefund.us.
Ranch buying in the Rockies (Rocky Mountain West) and building it into your dream property is a wonderful experience. Knowing a few things up front can make creating your vision even more enjoyable. I have found that many of my clients are surprised by the cost to build on a ranch, so I would like to explain the primary factors that drive these costs and provide a brief explanation for each of them. The primary factors are remote locations, engineering considerations, extreme temperatures, and necessary professionals.
Building up a quality ranch in the Rocky Mountain West requires pulling from a workforce that is most often far from the location of the building site. I have seen cases where the general contractor traveled as far as 250 miles to build on a ranch. This is often necessary to find a company that possesses the business infrastructure, workforce and full understanding of all that a complex, multi-million dollar project entails. Using a workforce that is far from their home office adds cost because it requires housing, meals, transportation and increased wages for the workers. This is money well spent when you are getting a company that understands what it takes to do a remote ranch project properly.
Much of the Rocky Mountain West is located in the Intermountain Seismic Belt. The potential for earthquakes requires extra structural measures to be taken. Montana, for example, has recorded an earthquake with a magnitude of 7.5. Though this magnitude is rare, many smaller quakes occur each year, giving cause for ranch structures to be designed and inspected by a professional engineer. Many structural elements are required that hide within the floors, walls and ceilings and add cost, though they go unseen.
Considering the fact that some areas in the Rocky Mountains receive over 400 inches of snowfall annually, a ranch's roof structures must be designed very precisely. Calculations must be made and engineered specifications given for each structural component that goes into the roof system, often times requiring expensive steel I-beams and structural lumber to be utilized.
Wind is a defining part of the Western landscape, with gusts recorded over 100 mph. It blows through the valleys and makes it way up to the peaks. This becomes a very relevant concern when it comes time to build. Think about those long-abandoned barns and houses that dot the landscape of the West. They all lean with the prevailing wind. This is why modern building practices incorporate specified structural elements to hold the buildings upright and intact. These elements, though hidden, add cost.
When building on a mountainside, there must be geotechnical testing performed. This will give an analysis of the sub-surface conditions and let you know if the soil is suitable for a building site. Sometimes the soil is structurally sound. However, the soil on mountains can tend to shift, so this will require specified action to be taken in order to build a proper foundation that will hold the structure in place. In some cases, the existing soil must be removed, down to the depth determined by the engineer, and then replaced by structural soil. In other cases, the engineer will decide to leave the soil in place and do a micropile foundation. This is where many structural steel tubes are drilled into the ground until they hit bedrock, then they are filled with grout. The traditional concrete foundation is then built on these micropiles. This allows the soil under the structure to shift, while holding the structure in place. Either of these foundational elements adds to the cost.
The temperatures in the Rocky Mountains will range from sub-zero to over 100 degrees. It is common to have significant swings in temperature over short amounts of time, the ground freezes as deep as 60 inches, there’s high wind, heavy snowfall, and spring melting causes the streams and rivers to flood and all of these factors require that buildings are constructed to the highest, most modern standards available. Considerations such as waterproofing, insulation, cold roof systems, smart framing, ventilation, humidification, flood control, soil erosion control, waterway protection and road placement are just some of the countless things to consider. These factors are in addition to what a normal building project would require and consequently increase the cost.
The common progression when realizing ones dream of owning a ranch is to contact an attorney, buy the land, hire an architect, hire a land and stream consultant, and finally hire a general contractor. However, this system is flawed in many ways. This line of thinking requires the buyer to have time to focus all of their energy on their ranch project. It assumes the buyer is fully up to date and educated on everything from soil conditions, to grazing right leases, to best construction practices, and the list goes on. The buyer is often wrapped up in “learning as they go” and find themselves frustrated at how all-consuming the actual work of realizing their dream of owning a ranch quickly becomes. The best way to maintain control of the project is to bring in all of the required professionals from day one. Much of the team should be assembled before or at least in conjunction with the ranch going under contract. This is necessary to help the buyer understand the viability of their project and if the land is suited to fully meet their requirements. A full team of professionals should include a ranch broker, land attorney, CPA, tax attorney, cost segregation engineer, agriculture and livestock consultant, environmental engineer, land and stream consultant, architect, general contractor, and an owner’s rep/program manager to oversee the entire process. At first this long list of professionals may seem like added cost, but at the end of the day, these professionals are focused on minimizing the cost of the ranch in both the short and long term through income taxes, real estate taxes, construction costs, and general overhead of the ranch operation.
The best way I can put it is that you have to look at the life cost when you are buying and building a ranch in the Rockies. This is not the kind of place where you can just throw together a simple building. You should assemble a team that has experience in this type of climate. Find resources that will provide you with detailed questions to ask each of them. Have them walk you through their quality assurance process and ask them to tell you some things they learned from the last house they built or designed that will make your project be their best one yet. Finally, ask them why they live in the Rocky Mountain West. Your team has to not only understand, but share your passion, or they will never be looking out for your best interest.
Austin Rector, President
Can cost segregation help list and sell more commercial property? Yes!
Commercial property owners can employ cost segregation as a tool to help sell their properties. By offering the property with an engineered cost segregation study they do these things:
2) Reduces real estate transfer taxes
Section 1245 property assessed as FF&E which has lower valuation
Escrow requirement is correspondingly reduced which positively affects monthly operating expenses (FF&E…Furniture, Fixtures & Equipment)
3) Reduces Property & Casualty premiums (depending upon the jurisdiction)
Again, Section 1245 property is assessed like FF&E which has a lower premium>
Again, reducing escrow requirements
4) Debt-service coverage is increased allowing for a negotiated reduction in mortgage rate
This happens from the reduced income tax burden in the critical first five years of ownership
In addition to the reduction in operating expenses from real estate taxes and insurance
5) These reasons allow the “seller” to advertise their property with “cash” at closing which differentiates their property from the competition
Yes, the seller pays our fixed fee but they are buying huge benefits at pennies on the dollar
And yes, our fee is fully expensable and can be rolled into the price of the property
6) All of these areas addressed is sufficient to engage cost segregation
Cost segregation is an increasingly used tool to mitigate income taxes. Now, with the advent of the finalized “repair” regulations, cost segregation is virtually required by the IRS. In fact, how else can a commercial property meet the IRS regulations without it?
For the commercial real estate professional, cost segregation is “the” way to differentiate yourself from competition. You will list more property and sell more property. How could you not?
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