Ways to reduce tax liability on my cash flow

Tax, SDIRAs & Cost Segregation
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Ways to reduce tax liability on my cash flow

Josh Garner
Lender · Bend, OR · Member since 2016 · 64 posts · 45 votes

Hey BP! What are some ways I can reduce my tax liability on my rental property? After reviewing my taxes, I earned $26,400 in rental income on my property, and all expenses (mortgage interest, repairs, depreciation, insurance, etc) totaled to about $13,900, leaving me with about $12,500 in taxable income. Any way to reduce this liability and invest these gains back into real estate without doing a cash-out refi?

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Buddy Holmes
Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
9y

@Josh Garner, The first place to look is in the depreciation on your current rentals.  Either you have fantastic Cash Flow or you missed something in the depreciation.

Assuming you did the 27.5 year life calculation correctly the next step would be to see if you can do a Cost Segregation Analysis.  Here you look at the items in your rentals that can have 5 and 15 year life depreciation schedules.  If this is your first year with the schedule E's great.  write up a document of each 5yr item (floor treatments, light fixtures, etc ) and estimate the cost of each, sum the total and deduct from the initial purchase price used for the 27.5 yr and add the 5yr in with the special depreciation allowance the IRS gives you.  Repeat the above for the 15 year items which are the landscaping stuff outside.

Hope this helps. Cheers, Buddy

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  • Buddy Holmes
    Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
    9y

    @Josh Garner, The first place to look is in the depreciation on your current rentals.  Either you have fantastic Cash Flow or you missed something in the depreciation.

    Assuming you did the 27.5 year life calculation correctly the next step would be to see if you can do a Cost Segregation Analysis.  Here you look at the items in your rentals that can have 5 and 15 year life depreciation schedules.  If this is your first year with the schedule E's great.  write up a document of each 5yr item (floor treatments, light fixtures, etc ) and estimate the cost of each, sum the total and deduct from the initial purchase price used for the 27.5 yr and add the 5yr in with the special depreciation allowance the IRS gives you.  Repeat the above for the 15 year items which are the landscaping stuff outside.

    Hope this helps. Cheers, Buddy

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  • Josh Garner
    OP
    Lender · Bend, OR · Member since 2016 · 64 posts · 45 votes
    9y

    Thanks Alvin! Looks like the way it was prepared, I only claimed about $2000 in depreciation....not sure how that was calculated

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  • Buddy Holmes
    Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
    9y

    @Josh Garner,  What is the purchase Price of your rentals?  The $2000 would be for $55000 improvement.  Your county tax site or your tax bill should give you what the land value is and the total value is by their evaluation take the Improved value= total-land and divide by the total value.  Apply that % to your purchase price and that (or the tax improved number if larger) is your initial first year and subsequent base depreciation when divided by 27.5 years.   Is this your first year to fill out the Schedule E on this property?

    BP to the rescue! @Brandon Hall has written an article with more details on applying this approach to increase your depreciation.

     https://www.biggerpockets.com/renewsblog/2015/04/2...

    This should do the job. If you have filed already just send in an amended return.

    Cheers, Buddy

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    @Josh Garner 

    Small world- I'm actually from Bend. 

    This is where a good accountant/CPA/EA  proves their value. If you're working with a CPA they should be able to sit down and create a strategy that will help ensure you're maximizing your deductions. 

    Find a CPA who specializes in real estate investments. Yes, almost all have some clients who are...but there's kind of a different mind set involved with someone who has the same passion and knows the same ins-and-outs involved with more creative investing strategies. 

    Shoot me a PM if you'd like me to take a look at your Schedule E for you 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
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  • Josh Garner
    OP
    Lender · Bend, OR · Member since 2016 · 64 posts · 45 votes
    9y

     @Buddy Holmes, a CPA would have been very valuable to me this go around.  

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