Real Estate Tax Deductions Part I

[Julio Gonzalez]

“How can you use real estate to build wealth? Most people don’t know it, but owning real estate can be a major step forward in creating and maintaining your personal wealth. You only have to know how to master the art of the real estate deduction. As an accountant, I’ve spent over 20 years involved in commercial real estate, and I have several valuable ideas I’d like to share with you.”

I’m going to cover the Real Estate Tax Deductions with you in three parts. In the first part, I’m going to cover:

1. Depreciation Write-offs
2. Cost segregation

Depreciation Write-Offs

When you purchase a building, its value decreases over time. This is called depreciation. Building owners are able to depreciate their property over its useful life of 27 or 39 years depending on if it is considered residential or commercial property, respectively.

Cost Segregation

Cost segregation essentially recognizes the fact that a building is more than a single piece of property and consists of many subcomponents. These subcomponents could be anything from HVAC systems to light fixtures or flooring and exterior improvements. Instead of being depreciated over 27 or 39 years like the building itself, these subcomponents can be depreciated over 5 or 15 years depending on the asset. This increases the depreciation write off in the first several years after purchasing the property.

A huge incentive of cost segregation is that by reclassifying the subcomponents to a useful life of 5 to 15 years, these assets are also eligible for bonus depreciation. Bonus depreciation can be applied to assets with a useful life of less than 20 years. The 2017 Tax Cuts and Job act allows you to fully depreciate those assets in the first year of owning the building rather than waiting and depreciating them over their useful life.

Example: Let’s say you purchased a building for $100,000, you could deduct approximately $30,000 immediately utilizing the 100% bonus depreciation rule.

Be sure to check back next week for part 2!