|
|||
|
Dallas Tax Deductions (Tips for Individual Real Estate Investors) Dallas Tax Deductions (Tips for Individual Real Estate Investors) Dallas real estate investors including, those in Tarrant County, often pay excessive income taxes. They overstate income by understating real estate depreciation. The root cause is using a simplistic method to calculate depreciation, instead of the IRS-guided method. Tax deductions are not the top priority for most individual real estate investors. Tasks associated with generating income and profits typically take priority over arcane tasks related to reducing federal income taxes. They sometimes 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. Real estate investors face a daunting number of challenges in deciding which tasks merit priority. Being a successful real estate investor demands a reasonable level of expertise in many fields. This article addresses tax deductions sometimes over-looked by real estate owners. Tax Deductions Tax deductions reduce taxable income but do not directly reduce taxes. (Tax credits can directly reduce federal income taxes. However, there are currently few options to obtain federal income tax credits.) 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. (In other words, it is not desirable to spend $100 to save $35. It does not make sense to incur expenditures not necessary for a business purpose simple to increase tax deductions and reduce federal income taxes.) Let's review fine-tuning the depreciation schedule and reclassifying existing expenditures to increase tax deductions. Depreciation 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. Real estate investors are blessed with tax provisions far more favorable than those available to investors in other asset classes. The real estate industry has long received preferential treatment from Congress. IRS- Guided Help 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. Cost segregation is an IRS-guided technique that accurately apportions the value of components of real estate for the purpose of establishing the depreciation schedule. The IRS has provided detailed policies and guidelines for preparing a cost segregation study. "Catch-Up Depreciation 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. The ability to catch-up previously under-reported depreciation is the most powerful aspect of cost segregation. Unfortunately, few real estate owners and tax return preparers are aware of the ability to catch-up previously under-reported depreciation. Capital or Expense 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? Income Splitting 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.) Deductible Vacation 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. Claim All Relevant Deductions 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. Click here for a FREE preliminary analysis of income tax savings for your property. 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:
Property Type:
Industry:
Links & Resources | |