In this world, nothing can be said to be certain except death and taxes. –Benjamin Franklin
As the old saying goes, it is illegal to evade, but wise to try to avoid, taxes. Some new laws recently came into effect that can positively benefit many landlords. Here are three for your consideration.
1. Liberalized first-year depreciation for some rental property improvements. For qualifying properties purchased after September 27, 2017, the TCJA ((Tax Cuts and Jobs Act of 2017).) increases the maximum “Section 179 deduction” to $1 million (up from $510,000 for tax years beginning in 2017); it potentially allows you to deduct the entire cost in Year 1. This includes most improvements to the interior portion of rental units, as well as HVAC equipment, building roofs, fire protection, as well as alarm and security systems.
Accelerated depreciation is now allowed to be deducted in one year using what is known in the tax business as the “de minimis safe harbor deduction”. This applies to personal property costing up to $2,000, and allows you to take a 100% bonus depreciation. This particular law is in effect for tax years 2018-2022. Such personal property includes, for example, furniture and appliances (in rental units) as well as gardening equipment, etc.
2. Cost Segregation (CS) is an IRS preferred method for allowing property owners to accelerate depreciation and reduce the amount of taxes owed. With the new Tax Cuts and Jobs Act of 2017, this strategy is more valuable than ever. For commercial property and residential investment property owners, cash flow from tax savings of 5-8% through CS and tangible property regulation compliance is available. That’s about $50,000-$80,000 for each $1 Million in building costs, in most cases.
An engineering-based CS study identifies and reclassifies personal property assets to accelerate the depreciation which reduces current income tax obligations. The study accelerates the depreciation of your building/renovation components into shorter depreciation categories such as 5-, 7-, and 15-year rather than conventional 27.5- and 39 year schedules. Five- and 7-year items might include decorative building elements, electrical for dedicated computer equipment, and carpet. Often times, land improvements in the 15-year category include parking lots, driveways, paved areas, site utilities, walk ways, sidewalks, curbing, concrete stairs, fencing, retaining walls, block walls, car ports, dumpster enclosures, and landscaping. Building structural items (for example, foundations, plumbing, electrical, exterior façade, doors & frames, etc.) do stay on the 27.5 or 39 year depreciation life.
A CS analysis of the building is performed looking for up to 100 separate components that are in the earlier portion of their depreciation life, down to the striping on the parking lot. Reports are generated which are the supporting documents that allow the tax professional to take the missed tax benefit in the current tax year. A CS study is recommended for any property that has $200,000 or more in cost basis, has been held for 15 years or less, and will be held for at least 3 more years from the time of study, anywhere in the United States.
Real properties eligible for CS include buildings that have been purchased, constructed, expanded or remodeled since 2000. A CS study is efficient for all property types, and it can also uncover retroactive tax deductions for older buildings which can generate significant short-term benefits due to “catch up”.
3. CARES Act: A $2.2 Trillion bill was passed in response to the Corona virus Pandemic of 2020. There are parts of this bill that have a direct impact on Cost Segregation, such as: It allows for a five year carryback of net operating losses arising in 2018, 2019, and 2020. It also allows net operating losses to offset 100% of income (as opposed to being limited to no carryback and only to 80% income offset from carryforward losses under the Tax Cuts and Jobs Act of 2017 that was in place before the CARES Act).
It is recommended that you retain an experienced and qualified company to perform an engineered-based Cost Segregation and TPR (Tangible Property Regulations) study on your property. These companies endeavor to capture the maximum benefit allowed by the IRS. For more information, contact: Sabrina Gettler, 219-313-8687, sgettler@
Done right, a CS study combined with CARES Act benefits can result in substantial tax savings to landlords who take the time to study the issue carefully to see if one or both acts apply to you and your particular properties. NOTE: To be 100% safe, be sure to secure tax advice from qualified professionals (CPA, tax attorney, etc.) before making any decisions about properties and taxes.
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