Real Estate (Real Estate Tax Tips)
Real estate investors benefit from tax laws favoring real estate. Successful real estate investors can face massive levels of income taxes and property taxes. Tax planning from knowledgeable advisors allows real estate investors to minimize the pain of taxes. This article addresses increasing depreciation to reduce taxes from ordinary income, reducing property taxes, and deferring capital gains taxes by using a 1031 exchange.
Depreciation is a benefit available for real estate which is not available for most other investment vehicles. You can't depreciate the cost of buying stocks, bonds or gold. Depreciation both defers and reduces the amount of income taxes for real estate investors. Depreciation defers payment of income taxes from the time when income is earned to when the property is sold (or when the gain on the sale is recognized). Depreciation often reduces the tax rate for real estate investors. Instead of paying taxes on the ordinary income rate (35%), many real estate investors pay taxes for most of their income based on the capital gains rate (15%). Cost segregation is a tool used for real estate investors to increase depreciation and further defer and reduce federal income taxes. Cost segregation is a specialized service which identifies and quantifies the portion of the cost basis which is short life property. The short-life assets are depreciated over 5, 7 or 15 years. Most real estate is depreciated over 27.5 years (rental residential real estate) or 39 years (commercial). Cost segregation can increase the amount of depreciation by 50 to 100% during the first five to seven years of real estate ownership.
Property taxes are a large expense for real estate investors. They are often the largest line item expense. For example, in Texas, property taxes are about 3% of the market value of the property. It is not unusual for property taxes to be about one third of the net income before property taxes. Consider appealing property taxes as often as allowed by law. In Texas, annual property tax appeals are allowed. Most property tax appeals are successful. Consider both administrative and judicial levels of appeal. Many property owners perceive the administrative appeal as the only practical option. However, many tax consultants offer judicial appeals on a contingency fee basis.
Real estate investors can defer paying capital gains taxes by executing a 1031 exchange. The name for this process is derived from the federal tax code section which authorizes it. Rules are detailed but practical in many cases. When selling a property, investors can take their profits and reinvest them in a new purchase provided certain technical requirements are met. It is possible to indefinitely defer capital gains taxes by using multiple 1031 exchanges.
Taxes are a substantial burden for successful real estate investors. By using cost segregation to maximize depreciation, annually appealing property taxes, and using 1031 exchanges when appropriate, investors can substantially reduce the total level of taxes.
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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 where cost segregation generates meaningful tax deductions.
City:
- Memphis, TN
- Orlando, FL
- Denver, CO
- Phoenix, AZ
- Tampa, FL
- Los Angeles, CA
- Washington, DC
- Las Vegas, NV
- Miami, FL
- Hartford, CT
- Grand Rapids, MI
- Stockton, CA
- San Diego, CA
- San Jose, CA
- Fresno, CA
- Toledo, OH
- El Paso, TX
- Salt Lake City, UT
- Harrisburg, PA
- Greensboro, NC
- Boise, ID
- Durham, NC
- Palm Bay, FL
- Tucson, AZ
- Worcester, MA
- Ft. Lauderdale, FL
- Wichita, KS
- Santa Rosa, CA
- Virginia Beach, VA
- Jackson, MS
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Car wash facility
- Vacant land
- Auto salvage yard
- Bowling alley
- Power center
- Truck stop
- Nursing home
- Service center warehouse
- Medical office
- Warehouse
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Frozen food manufacturing
- Textile product mills
- Wood product manufacturing
- Computer and electronic manufacturing
- Beverage and tobacco product manufacturing
- Warehousing and storage
- Real estate lesser
- Fabricated metal products
- Air transportation
- Health care facilities
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