Real estate investments can be used maximize write-offs and minimize taxes. Investors can protect the income earned via rental real estate through depreciated deductions, especially in the first year leading to huge tax savings. This can be achieved in three different ways.
1. Cost Segregation Analysis
According to the American Society of Cost Segregation Professionals, cost segregation study is “the process of identifying property components that are considered “personal property” or “land improvements” under the federal tax code.”
This study helps to allocate value to various components that make up the building/property. If you are evaluating a property that’s 27.5 years old, you will get value allocated to 5, 7, 15 and 27.5-year property. This way, the write off over 5 years will have higher depreciation than 27.5 years. Doing a self-cost segregation study is possible but it takes time because you need to check the current prices of all the components in the property to arrive at the final value. Performing cost segregation study in the first year gives real estate investors maximum savings.
2. 100% Bonus Depreciation
According to The Tax Cuts and Jobs Act of 2017, the 100% bonus depreciation is applicable for any component that has a life of up to 20 years. The 100% of the value that is allocated for a 5,7, and 15 year property can be expensed in the first year, if the cost segregation study is done in the first year of ownership. Conducting both bonus depreciation and a cost segregation study helps write off about 20-30% of the purchase price of the real estate property in the first year. This acts as a huge tax saver for you.
3. Passive Losses
This depends on the adjusted gross income and the number of real estate property you invest in. If you’re not a real estate professional, and if your adjusted gross income is below $100,000, you can claim up to $25,000 of passive losses. In case the modified adjusted gross income goes beyond $150,000, the $25,000 passive loss allowance is not allowed. In case you are a real estate professional, you can claim an unlimited amount of passive losses.
If you are a real estate professional, claim a 100% bonus depreciation, and run a cost segregation study in the first year itself, you can enjoy maximum tax savings. Accounting and bookkeeping tasks in the real estate segment can be very tedious because it involves a number of transactions and state regulations that need to be closely followed. Since real estate deals with a lot of money, its important for the person doing these tasks to understand the nuances well to manage them.
Sometimes, with real estate work keeping you busy it’s hard to set aside time to manage bookkeeping. An accounting and bookkeeping partner can help keep up with financial records, file taxes, and more. If you are a real estate professional looking for a partner who can help you with monthly financial statements, custom reporting, analytics, CAM reconciliations and more, SmartFin is the best choice. We have over a decade of expertise in providing end-to-end accounting and bookkeeping services for our clients worldwide. If you would like to explore working with us, please drop us a line and we’ll get back to you.