Tax deductions are not the top priority for most individual real estate investors. They often work out of their home with no employees, other than those on-site at the property. Challenges (aside from tax deductions) include selecting what property to purchase, screening tenants, repairs, managing expenses, obtaining financing, and deciding when to sell. This articles addresses tax deductions sometimes over-looked by real estate owners. Tax deductions reduce taxable income but do not directly reduce taxes. For example, $10,000 in additional tax deductions will generate $3,500 in federal income tax savings ($10,000 X 35%), assuming a 35% federal income tax rate. Since most tax deductions require a cash expenditure, increasing actual expenses to increase tax deductions is not desirable. Let’s review fine-tuning the depreciation schedule and reclassifying existing expenditures to increase tax deductions. Real estate depreciation is a potent but underutilized source of tax deductions. Real estate depreciation schedules are commonly established by just separating land from the improvements. This is analogous to asking a world-class pianist to play a piano which is not tuned and has several keys which are not functioning. The results are just not as good as they should be. Congress has provided depreciation as a tax deduction to encourage real estate ownership and investment. Numerous court decisions have provided clear guidance for accurately and precisely depreciating real estate. Cost segregation can typically increase real estate depreciation by 50-100% in the first 5-7 years of ownership. Owners can claim a tax deduction windfall for properties owned more than one year by “catching-up” previously under-reported depreciation. After obtaining a cost segregation report, you can “catch-up” depreciation without filing any amended tax returns. Another meaningful source of tax deductions is to scrutinize any cash expenditures which are being capitalized. Have minor repairs been capitalized in error? Are there more significant repairs which do not clearly extend the life of a component? Discussing these items with your accountant can yield additional tax deductions. Also review items which were capitalized in prior years; can you claim any of them as current year tax deductions? Child labor can be good when they are your children and you claim a tax deduction. Consult your accountant or CPA but this can generate additional tax deductions of $5,000 per child, upon which they pay no taxes. (If they are feeling generous, they may return the money as a tax-free gift.) A tax-deductible vacation is an attractive option to make an expenditure deductible. Simply plan a vacation around a business trip for a meeting or seminar. Your airfare and hotel for the business period are deductible. Hotel before or after the business activity and your spouse’s airfare (assuming that your spouse is not involved in business) are not deductible. Half of meals during period with business activity are deductible. Reviewing personal expenditures can generate additional tax deductions. Items used for business such as computer, printer, office supplies, seminars, association dues, and business publications can be deducted. Long distance business phone calls can also be deducted. Self-employed persons can deduct the entire cost of health insurance premiums. Record keeping for tax deductions does take a modest effort. However, the federal income tax savings make it worth the effort. 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 cities where cost segregation generates meaningful tax deductions. City:
Las Vegas, NV
Boston, MA
Tampa, FL
Hartford, CT
San Francisco, CA
Memphis, TN
Miami, FL
Denver, CO
Phoenix, AZ
Orlando, FL
Boise, ID
Chicago, IL
El Paso, TX
Oxnard, CA
Rochester, NY
Cincinnati, OH
Jackson, MS
San Jose, CA
Fresno, CA
Charleston, SC
Omaha, NE
Oklahoma City, OK
Buffalo, NY
Albuquerque, NM
San Antonio, TX
Charlotte, NC
Allentown, PA
Austin, TX
Baton Rouge, LA
Jacksonville, TN Cost segregation produces tax deductions for virtually all property types, including the following: Property Type:
Used car lot
Research and development
Nursing home
Lumber storage
Truck stop
Tennis club
Hospital
School
Movie theatre
Lodging Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation. Industry:
Golf courses and country clubs
Textile product mills
Nondurable good wholesalers
Durable good wholesalers
Real estate lesser
Electrical component manufacturing
Textile mills
Laundry facilities
Automotive parts distributors
Plastic and rubber products manufacturing
O’Connor & Associates is a national provider of investment real estate consulting services including commercial real estate appraisals, tax deductions, cost segregation, property tax appeals, due diligence, and insurance valuations.
Appraisal services are provided for all commercial property types including nursing homes, discount stores, truck terminals, tennis clubs, supermarkets, country clubs, medical offices, mini-warehouses, restaurants, vacant lands, skating rinks, community shopping, centers, power centers, car wash facilities and service stations.
Assessing the Real Estate Market
Putting the Pieces Back Together
Is Now the Best Time To Buy or Invest in Real Estate?
© Copyright 2009 by Tony Alonzi, all rights reserved
If your needs dictate and your financial wherewithal remains intact, the simple answer is yes! What is to be gained by waiting? Will prices go down much lower? Will such favorable financing be available in the future? The most likely outcomes to these questions do not appear to support a wait and see approach. Sources of financing and terms as favorable as are now available provide strong impetus to buy now…while everything favors the buyer.
Will there be more foreclosures, more short sales and work outs on the market. Yes there will be additional properties available. Remember that the best deals, the most desirable short sales and REO buys will be the first to go. As the short sale becomes more main stream, and that is fast occurring, buyers and realtors will naturally be focused on the most desirable of these properties. This may just be the best time for a buyer even if the foreclosure trend continues for a few more years. It is also a time when your purchase, particularly of a short sale or REO will contribute the most to a sustainable recovery.
Look at the conditions in the market at this time. Realtor Magazine reported that short sales and REO constitute 40% of the real estate sales nationwide and are growing. Lenders approval for short sales is occurring more quickly and more frequently. The Treasury Department has provided incentives. A $1,000 incentive is paid to servicers when a successful short sale or deed-in-lieu of foreclosure is accomplished; $1,500 to the homeowner/borrower for associated expenses and up to $1,000 to the junior lien holders. The inventory of REO is large and growing. The conditions are primed for a buyer, and that there is very little to be gained by waiting. As the economy begins to recover, there will be fewer incentives, higher prices and less from which to choose.
The homebuyer’s tax credit of $8,000 has been extended through April 30, 2010. In addition, a credit to purchasers of new or existing homes of up to $6,500 are available as long as they have owned and occupied their existing home for at least five of the past eight years. The Extended Home Buyer Tax Credit provides the maximum credit to buyers with incomes of up to $125,000 for a single buyer and $225,000 to couples. The credit is capped at homes of $800,000 or less. The buyers will have until July 1, 2010 to close for the credit to be applicable.
The time honored rule still applies…Location, location, location – do you remember that axiom about real estate? Well it remains cogent. As with any real estate purchase, do your homework, and don’t overbuy in hopes of cashing in on the equity at some future date. You’ve heard it, you’ve read it: The single family home may no longer be the best retirement plan. If you buy smart, and you buy to fit your needs, the risks of ownership are greatly diminished, and there will be upside potential. Fast equity growth may not be as dramatic in the near future, but that probably makes for a better, more stable economy. When somebody cashes in on a huge equity growth, someone else likely has overpaid. Guess who will feel the pinch when the economy adjusts. Right, whoever is left holding their asset!
So the message seems clear enough if you follow three simple rules:
Buy in good neighborhoods
Buy to fit your needs
Do your homework
The experienced seller’s or buyer’s real estate agent should be the first one on your team. You will want to look around, kick some tires. The Internet has become the primary method for searching for residential real estate. It can be instrumental in leading you to knowledgeable, experienced agents as well. Any short sale that is promoted on the Internet will be placed there by a real estate agent. The system relies on the real estate agent to connect the dots. Anyone interested in selling their home in this fashion will find a real estate agent that specializes in short sales and distressed properties. That will be their best bet for a successful transaction, and it will be yours as a seller or buyer.
If retirement or just a change of scene and life style motivates you, now is a good time to look for a home. Many Americans have decided that it would be desirable to de-stress or perhaps to simplify their life styles. Perhaps you have decided to do with a bit less. Most of us have figured out that we don’t need as much “stuff” as we have accumulated. Maybe it is time to act on it. You may have a home to sell; perhaps it is a good time for estate planning with the disposition of your home. Consider your options and your needs. There should be many desirable properties that will fit, and the timing couldn’t be better.
SO WHAT ABOUT THE INVESTOR
The experienced investor knows that this is the time to buy real estate. The upside for building equity is probably not as strong as it was during the more bullish stock market; however, if you buy right, your investment is sound, and equities will grow. The key, as we should all have learned is to have reasonable expectations with the risk/reward model. As the equity and capital markets recover and grow, real estate is one of the first segments of the economy that benefits. The same considerations apply as for the home buyer. If you are not already a seasoned investor, you might want to read over Four Things the Real Estate Investor Knows ©, a publication in this series that I call “Putting the Pieces Together”. It is a primer for the real estate investor. Here are three things that should guide your investment decisions:
Buy according to your plan
Buy in good neighborhoods
Do your homework
Do not take large risks until you are experienced
Here are some other thoughts to entertain you. New home construction will slow down. There simply isn’t the demand at this time. We won’t have much of an increase in these numbers until the short sale and REO markets have matured. The new home builders must do some building to keep their operations viable, and they will offer incentives to attract buyers. The competition from the short sale and REO markets will be strong. It is actually in the best interest of the home builder to have these homes recycled back into the economy as soon as possible. They won’t be able to grow again until the economy achieves a sustained recovery.
The resale market will soften as well. Sellers that absolutely do not have to sell will not. They will remain in their homes longer, or they will compromise cashing in on their built up equity. It is apparent that home ownership trends in America are being reshuffled. This is obviously tied to the economy and employment. Markets that add new jobs, the kind of jobs that add value and not simply service side employment, will recover the quickest. This should be a consideration in any business plan for an investor.
The final consideration is to look at the economy, the system. If you believe in America, the American spirit and ability to rebound, then you will be a part of the solution. We have learned the hard way that nothing is too big to fail. Everyone, everything experiences failure. Failure is a given. It is the way you overcome your failures, how you pull together to get things back on track, that is what determines winners from losers. I’m betting on America, I’m betting on our system, I’m betting on you.
Now is the Time to Buy!
With 29 years as a title insurance executive with a national company and six years as a consultant and writer in the real estate industry the real estate economy is a part of my life. Over the years, I have bought and sold 5 residences and 5 rental properties. A great deal of my career was spent overseeing hundreds of thousands of real estate closings and the processes and technologies by which they were conducted.
Charlotte Real Estate Prices Fall
Charlotte nc real estate prices fell 7.2% in Dec. from a year earlier.
They fell 2.5% in Dec. from Nov.
The 7.2% price decline was among the smallest of the 20+ markets tracked by the national Home Price Index.
Denver Colorado was the healthiest of the 20 cities, with a 4% drop in home prices when compared with Dec 2007.
The overall national index of the 20 cities saw an 18.5% decline. Phoenix Arizona was the weakest market with a decline of 34%, followed by Las Vegas Nevada, down 33% and San Francisco California, down over 30%.
The national index says as of Dec 2008, average home prices across the U. S. A. are at similar levels to what they were in the 3rd quarter of 2003. From the peak in the second quarter of 2006, average home prices are down over 25%.
there are some strong signs that we just might be at the real estate turnaround point.
The first sign is the massive stimulus bill signed into law by President Obama is certain to pull new homebuyers into the real estate market who would have otherwise have stayed on the sidelines and kept renting.
The new federal tax credit goes up to $8,000 and does not have to be paid pack, unlike last year’s ineffective credit program. It’ s mainly intended for first time homepuyers, but under the program definition, you’re a first time homebuyer as long as you haven’t owned or co-owned a house during the last three years.
You might have sold your long-time home in 2005 or early 2006, and haven’t owned a house since, but you still qualify as a first timer for the $8,000 credit this year. Hopefully there will be more incentives and buyers coming out. Personally, I’m expecting a great spring and summe
