Landlords, the Tax Deduction You Should Know About and Your Cpa Might Not be Telling You About

Investment real estate provides separate things for separate investors. Some buy real estate for the hopes of appreciation, some investors buy real estate for monthly cash flow, and still others purchase investment real estate for the tax benefits. There is a large quantum of the investment society that buys for all of these reasons. So, what type of investor are you?

Congress, along with the Internal revenue Service, provides a great many financial benefits for those who spend in real estate. From subsidized housing programs like Section 8 to the Gulf opening Zone (Go Zone), real estate is as inspiring an investment as it has ever been, thanks in large part to the federal government. The tax benefits of investing in real estate can frequently growth the Roi immensely.

Miami Dade Personal Property Tax

Take a piece of rental property, for example. The Irs allows a multitude of tax deductions, including: mortgage interest, travel, tenant background checks, repairs, utilities, advertising, landscaping, pest control, professional fees and the list goes on. These are all expenses as categorized by the Irs. Whenever you have one of these expenses, you'll most likely write a check or use your prestige card to pay for it. So if you gain 00 in rent, and then pay all of these expenses, you may have 0 left over in your account at the end of that month. That's not too bad when you spend in real estate for cash flow.

There is however, someone else " expense", the Irs allows you to take. It is called depreciation. Although depreciation is classified as an expense, you do not write a check to pay for it. Depreciation allows you to spread the cost of the building out over a duration of time, and to take a quantum of that purchase price over that time. industrial structure typically have a depreciation duration of 39 years, while residential structure have a depreciation duration of 27.5 years. Depreciation is determined only on the building, the cost of the land has to be removed before calculating the each year depreciation. Let's look at example:

Home purchase Price: 0,000.

Land Value: ,000.

Building amount to Be Depreciated: 0,000.

As you can see, we have a home purchase price of 0,000 and the land was valued at ,000. What we subtract the 000 land value from the total purchase price of 0,000, we are left with a building value of 0,000. according to the current Irs rules, this 0,000 can now be spread out over 27.5 years. So take the 0,000/27.5 = ,818.18 per year.

The building is not the only part of your rental property that can be depreciated, however. The Irs Tax Code also allows you to depreciate the "personal property", called Chattel. In addition, the Irs allows you to accelerate this depreciation over a shorter duration of 5 to 15 years. Let's look at a minuscule bit of background on how this Irs tax deduction came about. A court case called Hospital Corporation of America vs. Comm [109 Tc 21 (1977)] makes all this possible. This case rules, that it is allowable to isolate Section 1245 property from Section 1250 property. Your Cpa should be well-known with section 1245 property and section 1250 property. After this case was settled, the Irs issued an Audit Techniques Guide ([http://www.irs.gov/businesses/small/article/0],,id=108149,00.html) on cost segregation. In this guide, the Irs describes some methods for determining the value of Section 1245 property. One of the methods is the "Residual appraisal Approach.".

Basically, what this allows a rental property owner to do is segregate the value of the personal property, or chattel, and accelerate the depreciation on its’ value over a duration of 5 or 15 years.

So what is chattel? The Irs has identified over 65 items that qualify as chattel, including: flooring, cabinets, countertops, lighting, blinds, appliances, landscaping, walkways, driveways, swimming pools etc. So just how much chattel is there in a rental property? A conservative amount to use is 10% of the purchase price. Many times, this percentage is much higher. Let's go back to our customary example above and use a chattel amount of 10%:

Home purchase Price: 0,000.

Land Value: ,000.

Chattel Value: ,000.

Building amount to Be Depreciated: 0,000.

Let's now compute our new depreciation amount, together with the value of the chattel:

Building Depreciation: 0,000/27.5 = ,090.91.

Chattel Depreciation: ,000/5 (years allowed) = 00.

Total Depreciation: ,090.91+ 00 = ,090.91.

Additional Depreciation: ,090.91 - ,818.18 = 72.73.

By segregating the value of the chattel from the value of the building we earn further tax deduction of 72.73. Let's look at actual dollar savings:

Depreciation Amount: ,818.18 x 25% Tax Bracket = 54.55.

Depreciation amount with Chattel: ,090.91 x 25% Tax Bracket = 72.73.

Tax Savings: 72.73 - 54.55 = 8.18.

Keep in mind, these are conservative numbers. So, now you may be thinking, what are the drawbacks? You should always check with your tax adviser before employing a new tax strategy. The most base request about chattel is the concept of a recapture and the recapture tax when you sell the property. You may already be aware, you pay recapture with the straight-line 27.5 year depreciation. Recapture does also apply to the accelerated depreciation taken through this tax strategy.

Let's talk briefly about recapture and the recapture tax. A recapture tax is applied when ever a depreciated asset is sold. The recaptured amount is field to a maximum rate of 25%. The recapture tax percentage rate is based on the investors’ revenue tax rate, and is capped at 25%. This allows you to keep the 75%, and apply the Time Value of Money to create more investments. Let's use our example above, to interpret recapture. We will assume the investment property was held for five years before being sold:

Home purchase Price: 0,000.

Depreciation Taken: ,090.91 x 5 (years) = ,454.55.

Home Sale Price: 0,000.

Recapture Tax: ,454.55 x 25% (max rate) = ,363.64.

How many further properties could your purchase with ,363.64 available before you had to pay it back? Is it one, three, or more? Remember, if your tax rate is higher than 25%, you will keep the variation since you are cpped at 25%. This strategy also works with multi-family properties as well. The savings with manifold units multiplies greatly. If you own or are buying a large multi-family property, ask your tax professional about the Section 179 deduction. It provides over 0,000 in deductions with definite criteria.

Now, the ,000, which is the variation in the middle of our selling price of 0,000 and our customary purchase price of 0,000, is field to capital gain. That is, unless you have utilized someone else strategy such as the 1031 change or a Charitable Remainder Trust. The depreciation amount is not field to capital gain. Again, always check with your tax adviser before making a tax strategy decision.

Congress and the Irs have made real estate such an inspiring investment opportunity, it pays to apply every strategy available to maximize your cash flow and lower your taxes. Ask your tax consultant about a chattel appraisal and a cost segregation study and start using the tax code to your advantage!

Landlords, the Tax Deduction You Should Know About and Your Cpa Might Not be Telling You About