Tax time is here again! We know, it’s your favorite time of the year. Especially when you’re a small business owner with your personal tax returns to file along with your business tax returns. Last week we talked about using IRS’s Section 179 Deduction for small business owners.
This week, we’re addressing landlords.
When you purchase a rental property – houses, duplexes, apartment buildings, condominiums, etc. – you pay a lump sum to the owner, but you get more than the building(s).
Rental property consists of:
- The building or buildings
- Personal property inside the building(s) that are not building components, including carpeting and appliances such as refrigerators
- The land the building sits on
- Surrounding land specifically noted in the purchase agreement
- Land improvement, such as landscaping
Aside from the land, which is not depreciable, most rental property owners depreciate all of the aforementioned items together by using the 27.5-year recovery period for buildings and the straight-line depreciation method.
Cost Segregation
The IRS, however, offers another option: cost segregation. Cost segregation allows rental property owners to choose to depreciate assets individually – such as the personal property and land improvements separately from the building(s). It’s a more complicated method of calculating depreciation and requires better records; ultimately, however, it results in a larger total depreciation deduction each year during the first several years of property ownership.
Generally, owners can benefit by deducting the improvements they make to their property – appliance upgrades, cleaning, maintenance, repairs, etc. – along with other expenses associated with owning rental property, including:
Advertising- Insurance
- Legal fees
- Mortgage interest
- Taxes
- Utilities
Why Choose Cost Segregation?
Cost segregation, when done correctly, significantly reduces income taxes; other benefits include reduced property taxes, possible sales and use tax savings opportunities, and better borrowing leverage, including reduced interest rates or down payment requirements.
Rental property owners gain a tax benefit by choosing cost segregation – in addition to the benefits listed above, they also receive their depreciation monies over a much shorter period.
Setting up a cost segregation tax strategy isn’t simple, however. You’ll need a cost segregation study with a detailed written report to show the IRS in the event of an audit; the best way to do this is through a CPA.
For a CPA recommendation to handle your cost segregation tax strategy, or for other money matters, please contact Holdfast Wealth, and don’t forget – you have extra time to get your taxes filed this year; due to several factors, your tax returns aren’t due until April 18th!
