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| Federal Income Taxes Are Reduced Through Cost Segregation Federal income taxes are a substantial burden for most real estate investors. While some level of federal income taxation is necessary, it is both inappropriate and imprudent to pay more than your fair share. Cost segregation can provide meaningful federal income tax benefits. Federal income tax is based on net profit or taxable income. The basic formula for calculating taxable income is revenue less expenses (deductions). Expenses can include both direct payments to third parties (labor, rent, supplies, etc.) and non-cash deductions, such as depreciation and amortization. The federal income tax benefit real estate owners gain from cost segregation is a higher level of depreciation. This non-cash deduction reduces taxable income and federal income taxes. For example, if the amount of depreciation increased by $100,000 (as result of a cost segregation study), taxable income would decrease by $100,000, and income taxes would decrease by $35,000 (based on 35% tax rate). Most real estate owners depreciate real estate based on splitting the cost basis between land and improvements. The property owner or tax preparer typically estimates the proportion for the land and distributes the balance to long-life improvements. Long-life improvements depreciate over 39 years for commercial property and 27.5 years for multi-family and rental residential property. While this simplistic method is lawful, it cheats the real estate owner of tax deductions. A cost segregation study identifies up to 130 short-life components. These short-life components typically comprise 20-50% of the improvement cost basis and are depreciated over 5 years (20.0% per year), 7 years (14.29% per year) and 15 years (6.67% per year). Depreciation effectively changes the character of income from ordinary income to capital gains income. While the maximum federal income tax rate for ordinary income is 35%, the maximum rate for capital gains is 15% (less than half the ordinary income tax). Increasing depreciation also effects deferral of payment of federal income taxes. Instead of paying taxes at the ordinary federal income tax rate in the year income is earned, taxes are paid at the capital gain rate in the year the property is sold. Cost segregation effectively generates an interest free loan (until the property is sold) and reduces the tax rate. If you are a real estate investor or use real estate in your business, obtain a free preliminary analysis to determine if you could benefit from a cost segregation study. Prepare for the Year End! » Get a complimentary estimate of tax savings on your property  Please send me periodic real estate information. O'Connor & Associates -- Your Key to Real Estate Value Corporate Office: 2200 North Loop W., Suite 200 Houston, TX 77018 1-800-856-7325 Dallas * Houston * Los Angeles * Newport Beach If you would like to be removed from this list and receive no future real estate information, click here to unsubscribe. |
 Cost Segregation Benefits
About O'Connor & Associates O'Connor & Associates is a real estate consulting services firm, conducting business nationwide. Our professional staff in Houston, Dallas, Los Angeles and Newport Beach is available to help you with your tax, business and real estate valuation matters, including cost segregation studies, commercial real estate appraisals, commercial property tax reduction and litigation support. Hire O'Connor & Associates to save thousands through federal and ad valorem tax reduction. Visit us at www.poconnor.com. |
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