Talk tax to me.
There are basically two ways to get into a lower tax bracket: tax credits and tax deductions.
Income tax is the largest tax that businesses and individuals pay. Below is a picture of the 2021 tax brackets (for taxes due April 15, 2022). As you can see in the picture not all taxpayers are equal, but all taxpayers do have the same opportunities to pay less tax due to cost segregation. Cost Segregation is the IRS-approved process of accelerating depreciation on a Real Estate asset by separating non-structural personal assets and land improvements from real property assets. Real estate is known for its tax benefits and cost segregation is a great benefit. This tax deduction is a way to get into a lower tax bracket. Lower tax bracket = more money for you to do the things you love.
With cost segregation, you can depreciate interior and exterior parts of your property over 5, 7, or 15 years. Depreciating the property earlier than normal allows you to lower your tax bill sooner. As a passive investor, you want to find ways to boost your profitability. Also, depending on your circumstances, you may be able to eliminate your tax bill completely and carry over your operating losses to the future as well.
During a cost segregation study, an expert with experience in performing a thorough analysis of real estate will evaluate the property. The property is broken down into different costs and then those costs are segregated based on what it is. This allows investors to take advantage of the tax deductions earlier.
Some elements that are included in the study are:
Carpet
Wallcoverings
Accent lighting
Sidewalks
Landscaping
Furniture
Electrical equipment
Plumbing fixtures
Phone systems
Appliances
The expert will separate each item and determine how long each item can be depreciated. Every property and project type are different so numbers vary for each individual study. The lifespan of each item is important because short lifespans let the expert add bonus depreciation.
A cost segregation company performed a preliminary analysis for one of our properties. Below is an example of what someone could save due to cost segregation. The two different columns represent the savings with and without the added bonus depreciation in year 1.
The power of cost segregation is available for active and passive investors and is a great way of taking advantage of the tax deductions. If you have a way to not pay taxes, legally, it’s better to do that. The time value of money is an advantage if you can use your money to invest now, rather than later. At the end of the day, we strongly recommend you enlist your tax professional to ensure that you can make use of cost segregation. They know your financial situation and will walk you through the process, which can definitely be somewhat complicated.
At Adventurous Real Estate Investors, we have a cost segregation study performed on each of our assets. The way we structure our entities, allows us to pass through the depreciation to our limited partners. Become a limited partner with us so you can take advantage of cost segregation as well.
Until next time….
Explore more. Adventure awaits.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
