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.
Tax Deductions (Business Tax Deduction Tips)
Tax tips and tax help to assist taxpayers by describing options
for tax reduction and tax cuts through lawful tax deductions.
Tax deductions contribute to national prosperity by providing capital to business. Tax deductions reduce taxable income. A $100,000 tax deduction reduces federal income tax by $35,000 ($100,000 X 35%) assuming a 35% income rate. Options for increasing business tax deductions include revising depreciation schedules, reviewing fixed asset listings, casualty losses, bad debts, and charitable contributions.
Real estate depreciation offers substantial opportunity for increasing tax deductions. Most depreciation schedules are established by simply separating land and long-life improvements. This simple approach is lawful but sharply understates lawful depreciation. About 20-40% of improvements for most properties are short-life items. Short life items can be depreciated over 5, 7, or 15 years. There are about 130 short-life items that have been determined by legislation, tax court decisions and IRS rulings.
Real estate depreciation can typically be increased by 50-100% for the first 5-7 years of ownership by obtaining a cost segregation study. A cost segregation study precisely values up to 130 components of real estate that can be valued as short-life property.
By obtaining a cost segregation study, it is possible to obtain a windfall of tax deductions by “catching-up” previously under-reported depreciation. This one-time “catch-up” can occur in the first tax return filed after the cost segregation study is performed without filing any amended tax returns.
Reviewing fixed asset listings (of business personal property) can generate a meaningful amount of tax deductions. They often include items that should have been expensed, which have been sold or thrown away or which have an excessive depreciation life. Items that should have been expensed include operating expenses (sometimes included by error) and maintenance or repairs (which was necessary but did not increase the life of the assets or component.) Section 179 allows business to use up to $108,000 of 2006 capital expenditures as tax deductions. Confirm you are not capitalizing assets that could be claimed as a tax deduction.
Casualty losses also offer opportunity for tax deductions. For a casualty loss, you can deduct: 1) the market value immediately before the casualty less 2) the market value immediately after the casualty less the amount covered by insurance. The portion that is not intuitive is: the market value after the casualty is much less than the value before plus the cost to renovate. Other factors which can and should be considered for tax deductions are: lost rent/usage, stigma (in some cases), construction management, construction risks, and entrepreneurial effort.
Bad debts are a subjective matter. Judgment is required to accurately estimate the amount that should be claimed as a tax deduction. If bad debts have not been examined carefully for several years, they may offer a meaningful tax deduction opportunity. (This applies to companies who utilize accrual accounting. Companies who use cash accounting can’t claim a tax deduction for bad debt since they never recognized the revenue.)
Do well by doing good. You reduce taxes in several ways when making charitable contributions. For example, you purchased land 10 years ago for $200,000, and it is now worth $1,000,000. However, you now realize you will never use the land for the intended purpose. You can donate the land to a qualified charitable organization and take a tax deduction for $1,000,000. However, you do not have to pay capital gains taxes on the appreciation.
Tax deductions sometimes seem arcane and complicated. However, a knowledgeable team of advisors from several fields can reduce your federal income taxes. The complexity of the tax code makes it difficult for any one personal to be knowledgeable in all areas.
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:
New York, NY
Houston, TX
Hartford, CT
Las Vegas, NV
Memphis, TN
Philadelphia, PA
Orlando, FL
Phoenix, AZ
Atlanta, GA
Bridgeport, CT
Worcester, MA
Akron, OH
Harrisburg, PA
Salt Lake City, UT
St. Louis, MO
Portland, OR
Scranton, PA
Greenville, SC
Bakersfield, CA
Madison, WI
Chicago, IL
Fresno, CA
Riverside, CA
Albany, NY
Indianapolis, IN
Birmingham, AL
Ft. Lauderdale, FL
Baton Rouge, LA
Augusta, GA
Honolulu, HI
Cost segregation produces tax deductions for virtually all property types, including the following:
Property Type:
Medical facility
Shopping mall
Restaurant
Country club
Fast food restaurant
Power center
Hotel
Car wash facility
Convenience store
Health spa
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
Golf courses and country clubs
Transportation equipment manufacturing
Electrical component manufacturing
Real estate lesser
Apparel manufacturing
Wood product manufacturing
Plastic and rubber products manufacturing
Furniture stores
Beverage and tobacco product manufacturing
Building supply dealers
O’Connor & Associates is a national provider of investment real estate consulting services including commercial real estate appraisals, business personal property valuations, business purchase price allocations, business valuations, cost segregation studies, due diligence, and insurance valuations. O’Connor & Associates is a national provider of income tax, tax deduction,property tax,real estate consulting, market research,condemnation appraisals,highest and best use,cost segregation,financial modeling,Galveston central appraisal district,Tips and Tricks for Appealing Your Property Taxes in Brazoria,Brazoria county appraisal, and Federal tax reduction. 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.
Patrick C. O’Connor has been president of O’Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction.
This time of year, now through the first quarter of next year, you will see articles offering year-end tax planning tips. Tax planning tips can increase income in future years, so be careful. Many tax tips often involve accelerating deductions, deferring income, or last-minute charitable deductions (the first three following tips).
For example you may be compelled to make a large charitable contribution this year by December 31st. However if you could be in a higher tax bracket next year because your income is going up because of a substantial raise or bonus, you would have been better off to make the contribution next year. Some may say this is heartless, but I say just the reverse. If you pay less in taxes because of good planning, your will be better off financially and able to give more in the future.
If you have volatile income, before you use the tax savings tips here and in other articles, you may want to run projections for this year and next. A good accountant will run these calculations for you, but understand that tax law changes from year to year and from one administration to the next can often make predicting tricky.
1. Defer income
If you are able to defer income, such as commissions and bonuses until next year, you might be able to pay lower income taxes this year. However, you must consider what your income and taxes will be next year to be sure that you are not actually increasing your taxes.
2. Accelerating deductions
Accelerating major deductions such as state income taxes, property taxes, and mortgage interest may help anyone, especially during a high-income year. If you don’t think your personal income tax bracket will be higher next year, and you’re not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year.
3. Charitable Contributions
Consider making chartable deductions before the end of the year to receive a deduction. You must make the contribution by 12/31/2007.
Donate appreciated property such as real estate or stock instead of the proceeds of the sale. You may be able to receive a deduction for the value of the contribution without paying tax on the growth portion resulting from a sale, then a gift. If you intend to transfer appreciated property, begin early since it will take several weeks to make the change.
4. Alternative minimum tax traps
Many people face large AMT bills compared to previous years. Be warned if you have larger than usual medical expenses, non-federal income and real estate taxes, or miscellaneous itemized deductions; or if you have exercised large stock options, to name a few.
Year-end tax planning strategies can backfire under AMT. Be very careful accelerating some deductions and exercising stock options at year end. See a tax professional for information on your specific tax situation.
5. Be careful when investing new money in mutual funds at the end of the year
Call the mutual fund and find out when the distribution date is. You may want to purchase after the distribution date to avoid owing taxes on fund shares that you owned only for a short period of time and had little to no gain.
6. Contribute the maximum to retirement accounts
Contribute the maximum allowable to employer-sponsored defined contribution retirement plans, such as profit sharing, 401(k), 403(b) and 457(b) plans. This not only provides an excellent tax deduction, but it also helps you to plan for your future retirement.
You may want to contribute to an IRA; up to $2,000 is fully deductible if you did not participate in a company-sponsored retirement plan or if your income falls below certain levels.
If you are self-employed, you can contribute more to a pension plan than into an IRA. You have until December 31 to set up the plan.
7. Investment Losses
If your investment portfolio has stock that has depreciated in value and is worth less than when you originally purchased it, you may want to consider selling it. You may be able to use that loss to offset capital gains and ordinary income.
Be careful though; investment decisions should not just be for tax purposes. Make sure that you do your research before selling any investment. Some people react too quickly when investments lose value; others sometimes hold on too long. If you decide to sell and invest in something new, make sure that you examine your portfolio to ensure that you have the right mix of investments to match your investment profile, risk propensity and asset allocation model.
8. Save for College
Consider contributing to your child’s college savings into a 529 plan. The contributions are not deductible on your Federal return, but parents may be able to write off contributions up to a certain dollar amount on their state income tax return. Log on to SavingforCollege.com to find out information about your state.
9. Home Improvements
Here is a great deal. How about saving energy and the environment, lower utility bills, increase the value of your home and save on taxes all at once. Projects for the home’s shell (insulation, windows, sealing) and heating and cooling may qualify for a one time tax credit of $500. However you are running out of time, since they must be in place by the end of 2007. So while crawling around your attic looking for ornaments, think of adding insulation. If you made home improvements over the last couple of years, be sure to dig up your records; you may already be eligible.
Before moving forward on one of these projects, make sure that you get full information about these and other energy efficient tax incentives from The Tax Incentives Assistance Project at http://www.energytaxincentives.org/. There you will find more information about Home Shell and Heating & Cooling as well as Hybrid Passenger Vehicles and Solar Energy Systems.
10. If self-employed, buy equipment and supplies
Have you been putting off buying needed business equipment and supplies, or do you know that you will soon need them? Now may be the time to invest in your business and save taxes as well. Business tax can be complex; therefore it may be wise to first call your accountant prior to large purchases.
11. Give gifts to children
When you give to friends and family, it is usually not taxable to the recipient or the giver. Many people do not realize though if that gift exceeds $12,000 per person it is taxable to the giver, and at a high rate. Therefore, if you intend to give anyone more than that amount, you could give some this year and some next. The second tip is that you and your spouse can both give $12,000 per person, doubling the amount not subject to tax. Be sure to consult your legal and tax advisor prior to making all gifts.
Kent E. Irwin, ChFC, CLU, CAP, co-founder and CEO of eFinplan.com. eFinPLAN is the first and only web-based comprehensive consumer financial planning software designed for people who are trying to do a lot of their own financial planning. Find out more about how do-your-self financial planning and how to reach your goals at: => http://www.efinplan.com/
