Real Estate (Real Estate Wealth)
Real estate investment has generated wealth throughout history. Correctly timing the purchase and sale of real estate and minimizing taxes are a powerful combination. Correctly timing when to buy and when to sell is difficult, but possible for those who have the emotional fortitude to buy when others are selling. Minimizing taxes is possible for those who seek prudent counsel.
Real estate market timing is practical, but difficult. It is impossible to precisely buy at the bottom and sell at the top. However, there is often relatively clear evidence when the market has passed the bottom and when the market is approaching the top. Most investors understand there are cycles for real estate values. At the top of the cycle, when prices are highest, there is euphoria about real estate since it has been on an upward trend for a period of years. This is also the time when development is likely exceeding prudent levels. The next step in the cycle is the decline in real estate values as real estate fundamentals decline due to excess supply and possibly soft employment factors. As new construction slows, real estate fundamentals gradually slow their decline. It is never clear when the bottom has occurred. However, after several quarters of steadily increasing occupancy, it is often possible to project the market has passed the bottom if it is accompanied by several factors. These factors include a modest level of new construction, growing demand for real estate, improving rental rates and growth in underlying economic drivers such as employment. The next period of time, while real estate values are increasing, is the most exciting portion of the cycle. Investors are ecstatic as values, rents, occupancy rates and cash flow steadily improves. The number of buyers gradually increases. One of the signs the market is reaching a peak is when new real estate investors make what appear to be irrational decisions when purchasing real estate. Seemingly irrational prices and softening in the economic drivers (such as jobs) are a good indicator that the real estate market is at or near its peak.
Minimizing taxes is an important element in developing wealth. Warren Buffett talks about the benefits of tax efficient investments. Real estate is a tax efficient investment vehicle for several reasons. Real estate depreciation both defers and reduces federal income taxes. Depreciation defers federal income taxes since it reduces taxable income in the current year. Depreciation reduces the tax rate for most real estate investors. Instead of paying income taxes at the ordinary income rate (35%), they pay based upon the capital gains rate (15%), for a substantial portion of their income. Cost segregation is a tool used by sophisticated investors to increase real estate depreciation. Cost segregation is a specialized process typically performed by appraisers to identify and quantify components of the property which qualify for short-life depreciation. Depreciating some of the assets over a shorter period increases total depreciation by 50 to 100% during the first 5 to 7 years of ownership. Cost segregation is financially feasible for properties with an improvement cost basis of at least $500,000.
Purchasing when it appears markets have passed the bottom and selling when it appears markets are approaching the top has created wealth for many real estate investors. Tax planning which maximizes depreciation and minimizes ordinary income (taxed at 35%) allows them to keep more of what they have earned.
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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:
- San Francisco, CA
- Philadelphia, PA
- Dallas/Ft. Worth, TX
- Tampa, FL
- Baltimore, MD
- Las Vegas, NV
- Denver, CO
- Orlando, FL
- Memphis, TN
- Houston, TX
- Allentown, PA
- Sarasota, FL
- Poughkeepsie, NY
- Worcester, MA
- McAllen, TX
- Santa Rosa, CA
- Durham, NC
- Oklahoma City, OK
- Little Rock, AR
- Akron, OH
- Wichita, KS
- Salt Lake City, UT
- Lancaster, PA
- Austin, TX
- Augusta, GA
- Rochester, NY
- Cincinnati, OH
- Palm Bay, FL
- San Antonio, TX
- Louisville, KY
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Greenhouse
- Regional mall
- Bowling alley
- School
- Nursing home
- Auto service garage
- Service center warehouse
- Power center
- Lodging
- Hotel
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Arts, Entertainment, and Recreation
- Wood product manufacturing
- Truck transportation
- Transportation equipment manufacturing
- Golf courses and country clubs
- Textile product mills
- Amusement parks
- Electronic and appliance stores
- Chemical manufacturing
- Machinery manufacturing
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