25 Jul 4 Strategies To Increase Your Cash Flow On Real Estate
If you take the proper tax planning actions in reference to your rental property or office building, you can put more cash in your pocket with the following 4 tax reductions strategies:
- Accelerate depreciation on certain components of the building
- identify repairs
- allocate less to land
- retire old building components
Accelerate your Depreciation through Cost Segregation
When you engage a professional to do a cost segregation study (CSS), the goal is to identify component parts of the building that can be depreciated over an accelerated time period. For example, you purchase or own an apartment building for $2.2 million. The CSS identifies $200,000 of certain component parts of the building as 7 year property. If you are in the 40% tax bracket when you consider federal, state & local taxes, your tax savings would approximate a $50,000 tax reduction, and additional cash flow; and you have the added benefit of knowing the write-offs that will be available when you replace the building components.
Strategy 2- Repair Deductions
In the repair-versus-capitalization regulations issued recently by the IRS in its 267 pages, there are some real golden nuggets found in the final regulations. One is the ability to make an improvement and write off the cost of the old part. Example, you replace a roof on a rental property that cost $30,000; under the old regs you had to continue depreciating the old roof and also depreciate the new one. Now, you can write off the old roof by identifying its undepreciated basis using:
- the results of a prior CSS
- the producer price index to discount the replacement cost to an adjusted basis amount, or
- the pro rata allocation of the original cost to the replaced roof.
Repair deductions put instant cash into your bank account much faster than depreciation, as its an expense in the current year!
Allocate Less to Land
By making the proper cost allocation between land and the building when you purchase the property, you can maximize your depreciation deductions.
Land, unlike buildings, is not depreciable property–base the allocations at fair market values; and if possible put the allocated amounts in the sales contract at closing.
Absent an appraisal, the courts have allowed tax assessments, estimated replacements costs, and the taxpayer’s knowledge and experience as other methods of allocating between land and building.
Retire Old Components
Under the new IRS regulations, you can now assign a value to old components, and write-off the remaining basis.Under prior law, you were not allowed to write off the remaining basis of the components you ripped out–hiring a CSS professional could pay huge dividends to determine the write-off amounts of the old components.
Therefore, there are numerous ways to accelerate the yax deductions on rental properties or an office building that will increase your cash flow.