Tax Planning can save you thousands when you have a working relationship with your CPA.
Craig Cody spent 17 years with NYPD chasing bad guys on the streets of New York City. Today, he chases tax savings for real estate investors and small business owners.
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Craig recommends that real estate investors stay in regular contact with your accountant. If you act before consulting your accountant, it can cost you dearly.
Tax planning with your accountant can help you reduce the taxes you owe and propel your real estate investment strategy.
For instance, if you sell a building and expect to buy a new building with the proceeds, you may be shocked when your accountant informs you that you owe taxes on the sale of the building.
Regular communication with your your accountant and tax planning could have provided the proper structure to keep you from having “constructive receipt” and owing the tax.
Proper tax planning provides constructive ways to keep more for you. For instance, depreciation is tax free cash that real estate investors recognize when they file their income taxes. Unlike an operating expense that reduces cash flow and Net Operating Income, depreciation is an accounting tool that reduces the taxable income.
If you are a W2 employee, depreciation is something negative you associate with, ie: the declining value of your new car after you leave the dealership.
Unlike a car, real estate is an appreciating asset. When you invest in real estate, depreciation is an asset. You get the benefit of both appreciation and depreciation.
Depreciation is an allowable expense that recognizes the declining life expectancy of a business asset. In real estate, it can be applied in one of two ways; Straight line, or Accelerated. Tax planning will determine which option is available to you.
Straight line depreciation is used most often by passive real estate investors. If the property is a residential asset, ie single family or multifamily, the depreciation schedule is 27.5 years. If the property is a commercial asset, the depreciation schedule is 39 years.
If you are a real estate professional, you are can take advantage of a cost segregation study, and accelerate the depreciation of you property. Cost Segregation breaks the building into components and assigns life expectancy of 5, 10 or 15 years to the components depreciation schedule.
The depreciation is deducted from the the taxable income to reduce the taxes owed.
So, if you are making positive cash flow, the depreciation can lower the recognized income and reduce the tax owed.
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