Real Estate (Tips for Minimizing Real Estate Taxes)
Real estate investors can earn large amounts of money. However, no one wants to pay a large amount of taxes. Real estate investors face three types of taxes: taxes on ordinary income, capital gains taxes and property taxes.
Real estate offers investors options for reducing and deferring taxes not available with most other investments. Real estate investors can use depreciation to reduce and defer payments of federal income taxes. Using real estate depreciation to defer income taxes often changes the character of the income. The top tax rate for ordinary income is 35%. The top capital gains tax rate is 15%. In many cases, real estate depreciation changes the character of income from ordinary income to capital gains income. The payment of taxes is deferred until the gain on the sale of real estate is recognized.
Real estate investors use a technique termed cost segregation to maximize real estate depreciation. Cost segregation is similar in concept to a prior practice referred to as component depreciation. Component depreciation ended in 1986 as a result of the Reagan tax act. Cost segregation increases real estate depreciation by identifying and quantifying real estate components according to the economic life assigned to them by the IRS. The IRS developed a detailed methodology for compiling a cost segregation study. Appraisers use the Audit Techniques Guide as a reference when performing a cost segregation study. In most cases, a cost segregation study allocates about 20 to 40% of the real estate cost basis to components with either a 5, 7, or 15 year life. The net effect of allocating 20 to 40% of the cost basis to short life items is real estate depreciation increases by 50 to 100% during the first 5 to 7 years of real estate ownership. Cost segregation is financially feasible for investment real estate with a cost basis of at least $500,000.
Many real estate investors also use a tax-deferred exchange process referred to as a 1031 exchange. The moniker is derived from the federal income tax code section which authorizes the practice. Real estate brokers who specialize in this area and exchange intermediaries can facilitate a 1031 exchange. If you are contemplating a 1031 exchange, contact an intermediary or facilitator prior to selling your property. The rules which govern tax-free exchanges are rigid.
Cost segregation and 1031 exchanges both are meaningful options to legally reduce taxes. Its your money; keep as much as you legally can!
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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:
- Las Vegas, NV
- Boston, MA
- Washington, DC
- Phoenix, AZ
- Tampa, FL
- New York, NY
- Houston, TX
- Orlando, FL
- Hartford, CT
- Philadelphia, PA
- Richmond, VA
- San Diego, CA
- Oxnard, CA
- Louisville, KY
- Manchester, NH
- Toledo, OH
- Des Moines, IA
- Allentown, PA
- Palm Bay, FL
- Springfield, MA
- Nashville, TN
- Portland, OR
- Chicago, IL
- Scranton, PA
- Omaha, NE
- Wichita, KS
- Charleston, SC
- Honolulu, HI
- Lancaster, PA
- Madison, WI
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Commercial building
- Cold storage facility
- Nursing home
- Used car lot
- Supermarket
- Night club
- Land
- Manufacturing/processing
- Bowling alley
- Auto dealer
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Computer and electronic manufacturing
- Food and beverage stores
- Chemical manufacturing
- Nondurable good wholesalers
- Food manufacturing
- Mineral product manufacturing
- Health care facilities
- Textile product mills
- Publishers
- Apparel manufacturing
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