Tax Deductions Generated Through Cost Segregation
Taxation beyond that which is necessary is robbery. - Calvin Coolidge Tax deductions are a valuable method of decreasing federal income taxes. However, real estate owners who do not claim meaningful lawful tax deductions are unknowingly paying far more than is necessary. While many real estate investors would readily agree federal income taxes are higher than is appropriate, few would report they are voluntarily paying more than is necessary.
Most income tax deductions consist of payments to third parties for labor, rent, materials, etc. Non-cash tax deductions include depreciation and amortization.
Depreciation offers the potential to be a substantial tax deduction for real estate owners and investors. However, in most cases the preparation of the depreciation schedule is rudimentary and includes only land and improvements. Long-life improvements are depreciated over 27 ½ years for rental residential property and 39 years for commercial property. However, in addiction to the long-life property, there are up to 130 components that can be depreciated over 5, 7, or 15 years.
Cost segregation identifies all the short life components and thereby increases depreciation, a material tax deduction. In most cases, it is possible to “catch-up” under reported depreciation the year a cost segregation report is prepared. Claiming the catch-up depreciation does not require filing amended tax returns.
Cost segregation typically identifies about 20-40% of the cost basis of improvements as short life property. These short-life assets can be depreciated over 5, 7, or 15 years, versus 27.5 years for rental residential property. Annual depreciation typically increases by 50-100% during the early years of ownership.
Tax benefits of more depreciation include tax deductions, tax reduction and tax deferral. Taxes are reduced since depreciation effectively changes the character of income from ordinary income (maximum of 35%) to capital gains (maximum of 15%). Depreciation defers payment of taxes from the year it is earned until the property is sold.
I believe President Coolidge would have heartily endorsed cost segregation to increase the number of tax deductions.
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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 where cost segregation generates meaningful tax deductions.
City:
- Los Angeles, CA
- Orlando, FL
- Las Vegas, NV
- Miami, FL
- Baltimore, MD
- Phoenix, AZ
- New Orleans, LA
- Denver, CO
- New York, NY
- Tampa, FL
- Albuquerque, NM
- San Antonio, TX
- Portland, OR
- Harrisburg, PA
- Santa Rosa, CA
- Little Rock, AR
- Portland, OR
- Knoxville, TN
- Baton Rouge, LA
- Oxnard, CA
- Omaha, NE
- Jacksonville, TN
- Lakeland, FL
- Charleston, SC
- Virginia Beach, VA
- Sarasota, FL
- Augusta, GA
- Austin, TX
- Sacramento, CA
- Palm Bay, FL
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Service station
- Bank
- Department store
- Greenhouse
- Restaurant
- Bowling alley
- Service center warehouse
- Medical office
- Warehouse
- Discount store
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Computer and electronic manufacturing
- Electrical component manufacturing
- Apparel manufacturing
- Golf courses and country clubs
- Textile mills
- Air transportation
- Laundry facilities
- Food manufacturing
- Frozen food manufacturing
- Nondurable good wholesalers
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