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Tax Deductions for Real Estate Owners - O'Connor and Associates

Tax Deductions for Real Estate Owners

Tax deduction merit attention similar to selecting a property reducing, operating expenses and timing the sale of property. Tax deductions reduce taxable income. (Tax credits directly reduce federal income taxes.) In general, there are two types of tax deductions: cash and non-cash. Cash tax deductions are primarily operating expenses, although some cash disbursements are capital expenses. Non-cash tax deductions include depreciation, amortization, charitable contributions, casualty loss and theft. This article focuses on discretionary cash tax deductions and non-cash tax deductions.

Industry practice varies widely regarding what expenditures can be “expensed” (generating a tax deduction) versus which need to be capitalized (and depreciated over a period of years). Examples of items where practice varies include carpet and used carpet for apartments, used appliances, resurfacing countertops, paving repair, roof repair, and exterior painting. Repairs can be expensed unless they extend the life of a component. There is room for reasonable people to disagree regarding whether roof repair extends the life of the roof. Carpet is often replaced every 1-3 years at low-income apartments, which have annual turnover rates of 60-70%. Carpeting is officially classed as a 5-year property but many owners elect to expense it (i.e.., take as a tax deduction instead of capitalizing). Consult your accountant, CPA, or tax lawyer regarding which items you can include as tax deductions.

Real estate depreciation is under-utilized as a source of both tax deduction and tax reduction. Most real estate owners establish their depreciation schedule by simply separating land from long-life improvements. Long-life improvements are depreciated over 39 years for commercial property and 27.5 years for rental residential property. Precisely preparing your depreciation schedule typically increases your depreciation by 50 to 100%. Cost segregation increases tax deductions by identifying and valuing up to 130 items which are depreciated over 5, 7, or 15 years. These items usually account for 20-40% of the improvement cost basis.

Real estate owners who have owned properties for a period of years can generate a 1-time depreciation windfall by “catching up” previously under-reported depreciation (this does not require filing amended tax returns).

Increasing depreciation effects tax reduction since it shields ordinary income from taxation and the gain on sale is usually taxed at 15% (based on how the sale proceeds are allocated). Cost segregation is a relatively new technique, used primarily by sophisticated investors. It is financially feasible for properties with an improvement cost basis of $500,000 and higher.

Casualty losses can be a rich source of tax deductions. You can deduct the difference between the market value before the casualty and immediately after the casualty (less the amount covered by insurance). The difference in market value can exceed the physical damage due to loss of revenge, construction risk and entrepreneurial profit.

Charitable contributions can generate meaningful tax deductions. The ideal scenario is to donate property which has appreciated. You receive credit for the current value but so not have to pay capital gains tax or the increase in value.

Careful planning is required to maximize tax deductions. However, given the effort required to generate income, planning tax deductions is worth the effort.

Click here for a FREE preliminary analysis of income tax savings for your property.

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.

  • Baltimore, MD
  • New York, NY
  • Hartford, CT
  • Bridgeport, CT
  • Memphis, TN
  • Boston, MA
  • Las Vegas, NV
  • Dallas/Ft. Worth, TX
  • San Francisco, CA
  • Orlando, FL
  • Palm Bay, FL
  • Columbus, OH
  • Richmond, VA
  • Louisville, KY
  • Knoxville, TN
  • Indianapolis, IN
  • Rochester, NY
  • Jackson, MS
  • Chattanooga, TN
  • Bakersfield, CA
  • Oxnard, CA
  • San Diego, CA
  • El Paso, TX
  • Jacksonville, TN
  • San Antonio, TX
  • Durham, NC
  • Tucson, AZ
  • San Jose, CA
  • Little Rock, AR
  • Wichita, KS
Cost segregation produces tax deductions for virtually all property types, including the following:

Property Type:
  • Discount store
  • Medical office
  • Skating rink
  • Hospital
  • Power center
  • Truck stop
  • Fast food restaurant
  • Bar
  • Nursing home
  • Self-storage
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

  • Furniture stores
  • Beverage and tobacco product manufacturing
  • Amusement parks
  • Apparel manufacturing
  • Electronic and appliance stores
  • Machinery manufacturing
  • Chemical manufacturing
  • Wood product manufacturing
  • Nondurable good wholesalers
  • Golf courses and country clubs

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