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Depreciation Reduces Income Taxes (Tips to Increase Depreciation)
Depreciation reduces and defers income taxes. Income taxes are too high. Investors can benefit from tax laws which markedly reduce federal income taxes. These tax rules include depreciation, cost segregation, fixed asset audits, tax-free exchanges, and casualty losses. Surprisingly, some of these tax benefits are not widely used. This article briefly reviews how investors can reduce federal income taxes by utilizing cost segregation and fixed asset audits to increase depreciation.
Depreciation is a powerful tool in reducing federal income taxes. Depreciation is a non-cash expense which both reduces and defers the amount of income taxes. Depreciation reduces the level of income taxes by converting the character of income. Depreciation converts income which would have been taxed as ordinary income (maximum tax rate 35%) to capital gains income (maximum tax rate 15%). In some cases, depreciation converts ordinary income to income that is taxed 25%. However, in many cases, the allocation of gain on sale shifts most of the gain to capital gains rate income versus income taxed at 25% or 35%. Depreciation defers payment of income taxes from the time when income is earned until the property is sold, or the gain for the sale is recognized.
Most investors recognize the benefits of depreciation on their income taxes. Few investors recognize the power of using cost segregation to increase the amount of depreciation and reduce federal income taxes. Cost segregation is a specialized service typically performed by real estate appraisers or engineers. Buildings are depreciated over 27.5 years (rental residential real estate) or 39 years (commercial real estate). However, there are up to 130 short-life components which can be depreciated over 5, 7 or 15 years. Cost segregation specialists can identify up to 130 different 5, 7 or 15 year components which qualify for short-life depreciation.
A cost segregation analysis can typically identify between 20% and 40% of the total cost basis which can be depreciated as short-life property. This typically increases the amount of depreciation by 50% to 100% during the first five to seven years of ownership, decreasing income taxes owed. Cost segregation is typically financially feasible for properties with a cost basis of at least $500,000 (for the improvements).
Fixed asset audits often generate a windfall of depreciation. A fixed asset audit scrutinizes the fixed asset listing for a variety of errors. They can include capitalizing repairs, not writing off the under-depreciated balance of assets no longer owned by the company (since they have been sold, lost or disposed of) and over-stating the depreciable life of assets.
Final asset ledgers can total hundreds or even thousands of pages. Thorough review will typically generate a bounty of depreciation which compensates for the time and expense. Fixed asset audits can be performed by internal staff or outsourced if staff are not available.
Depreciation can be increased by utilizing cost segregation and fixed asset audits. Complementing your team of tax professionals with advisors with expertise in this area will reduce and defer income taxes.
Click here for a FREE preliminary analysis of tax savings resulting from 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 where cost segregation generates meaningful tax deductions.
City:
- Bridgeport, CT
- Los Angeles, CA
- Washington, DC
- Tampa, FL
- Philadelphia, PA
- Miami, FL
- Baltimore, MD
- Dallas/Ft. Worth, TX
- Orlando, FL
- Hartford, CT
- Cincinnati, OH
- Greenville, SC
- Durham, NC
- Fresno, CA
- Milwaukee, WI
- Charlotte, NC
- Baton Rouge, LA
- Pittsburgh, PA
- Little Rock, AR
- Lancaster, PA
- Charleston, SC
- Wichita, KS
- Rochester, NY
- Jackson, MS
- St. Louis, MO
- Boise, ID
- Palm Bay, FL
- Lakeland, FL
- Dayton, OH
- Poughkeepsie, NY
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Skating rink
- Self-storage
- Service center warehouse
- Fast food restaurant
- Car wash facility
- Movie theatre
- Medical facility
- Service station
- Motel
- Mobile home park
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Building supply dealers
- Leather product manufacturing
- Furniture stores
- Textile mills
- Durable good wholesalers
- Fabricated metal products
- Textile product mills
- Food and beverage stores
- Printing activities
- Nondurable good wholesalers
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