What Is the IRS Depreciation Schedule for Commercial Real Estate?
Commercial real estate is an asset qualifying for depreciation. It cannot be expensed as an ordinary method of write-off. However, in 2011, the US Congress passed legislation that allowed for 100% bonus depreciation on commercial real estate. In effect, this allowed for full expensing of the commercial real estate as an asset.
One way to accelerate your depreciation is through cost segregation. This allows you to reclassify your building into it's individual building components, some of which have a life that is much shorter than 40 years. For example, if your building has a computerized security system, you could depreciate the computers in the security system over a five-year period. This moves a lot of your depreciation to the front of the depreciation schedule -- earlier in your ownership of the building -- and saves you money in the beginning. No doubt you have heard your CPA mention "time-value of money"! But by taking more depreciation up front, you have less depreciation to claim in the future. Of course, the dollar is worth more today than tomorrow, so that's fine.
Donor advised funds (DAFs) provide an immediate income tax deduction as well as four other tax benefits.
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 email@example.com.
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.