With coronavirus still raging on, the economy is yet to stabilize. Thousands of people lost their jobs and most businesses have really been in trouble. Real estate is not doing good either. With people’s livelihoods in trouble, buying or investing in real estate is the last thing on their mind right now.
This is why it is essential for real estate investors to be really practical with their money. They have to be frugal and smart. One way to really make a dent in the cash flow is to reduce taxes. Real estate investors who may not have been meticulous with their taxes before should now be looking for ways to benefit from the tax rules.
A good way to reduce taxes is by maximizing the benefits of depreciation. Every asset has a useful life, which is the estimated number of years by which this will serve its purpose for the business. In essence, every year, the useful life decreases. That’s when depreciation comes in and lowers a taxpayer’s taxable income.
Cost segregation
The process by which a taxpayer imposes the depreciation of assets is called cost segregation study. This strategy accelerates the depreciation of assets n order to lower taxable income.
To be more specific about it, a multi-family property, for example, has a depreciation schedule of 27.5 years. With cost segregation study, a taxpayer can separate the property’s assets to have a much faster depreciation. The assets, minus the lot, could have depreciations of five, seven and 13 years. In some cases, the tax benefit could be over a million dollars.
However, cost segregation study should be done right for real property investors to really reap the benefits. The best way is to hire an expert like a cost segregation specialist. An expert could really take a look at one’s property and assess every asset that could aid the reduction of tax. While hiring a specialist will cost money, the savings that will result from it is so much more.
Bonus depreciation
Couple the cost segregation study with bonus segregation and it could really turn one’s financial woes around. The Tax Cuts and Jobs Act of 2017 includes a provision on bonus deprecation. It has always been available but only for new developments. The law allows the same strategy for new purchases.
But what exactly is this? It is a provision that allows real estate investors to get 50% to 100% depreciation during the first year as long as the asset has a useful life of less than 20 years. Although, this strategy can only be used for real properties used for business and not for personal properties.
It really pays that people understand how taxes work and the strategies that will allow them to save money by reducing tax. For those people who are still confused, there are experts that can help them with both cost segregation study and bonus depreciation. Basically, if one is reducing their taxes, then they are essentially increasing cash flow.