Cost Segregation - Tax Deductions
Taxes are your enemy, but tax deductions are your friends. Taxes are the great bane of most businesses. Alas, business deductions act as a salve to cool the burning and itching of your bank account.
Business taxes can be summarized simply as calculating your total revenue, reducing this amount by as many tax deductions as you can and then paying tax on the remaining amount.
Tax deferral strategies are a great way to minimize taxes, and cost segregation and IRC Section 1031 exchanges are two of the most valuable tax deferral strategies available to commercial real estate owners today.
Phrased as the “almighty tax deduction,” a 1031 exchange provides the investor the opportunity to defer 100 percent of realized capital gains. This equates to an interest-free, no-term loan on taxes due until the property is cashed-out. Most often, the capital gain taxes are deferred indefinitely because investors continue to exchange from one property to the next, and increasing the value of their real estate investments with each exchange.
In these exchanges, business or investment property is disposed of through a qualified intermediary, and the proceeds are used to purchase a replacement property of like kind. This results in a deferral of all or most of the gain that otherwise would be subject to income tax on the disposed property. The replacement property has a carryover tax basis that is generally the value of the replacement property less the gain deferred in the exchange. New guidance from the IRS and some of the most taxpayer-friendly legislation since the Tax Act of 1986 also have made a second form of income tax deferral—cost segregation—increasingly popular.
Year 1 federal income tax savings are typically at least two times the cost of a CSS. In many cases they are five to fifty times the cost of the study. The cost segregation study is only required once. Its cost is not recurring, but the benefits are recurring during the term of property ownership. A CSS can also materially reduce local property taxes by separating real and personal property for newly constructed properties.
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