Accelerated Depreciation? Anyone?

Question

Hello all, my name is Andrew Bitler. I am a small real estate investor with big problems. I recently joined a bunch of forums because there is an important issue I need to investigate. I am utterly confused about a certain tax strategy, so I hope you folks out there can help me out. Here is my situation:

I want to save on taxes and that’s why I invested in real estate. In 2006 I purchased 2 rental properties. I maxed out my deductions until I couldn’t find any other way to lower my taxable income. A lawyer told me to accelerate depreciation on my properties, but I didn’t want to have to pay him to figure out what that means. I imagine that means I can increase my depreciation deduction, but how? Anyone know what he is talking about?

Joshua D. · Answer

Andrew, 
I'm wondering why you, Christopher Novak, and bookkeeper all share the same IP.  The interesting thing is that you are all here trying to promote a piece of software.

The people on this site don't like sales pitches, nor do they like manipulative people.  If you wanted to tell us about your website, you should have just come out and done it instead of playing games.

N/A N/A · Answer

There's also a whole chapter covering this subject in Stephen Fishman's "Every Landlord's Tax Deduction Guide," Chapter 6, segmented depreciation.

I felt the same exact way as you until someone had a deep discussion with me. First of all, the cost separation process, which would normally be done over hours of painstaking research, can be done in less than five minutes if you use fair market values for figures and you use the REMOVED BY ADMINISTRATOR website. You can print out a 4562 and depreciation report for free and give it to your tax person. This is more simple than anyone could ask for.

So first of all, residential rental owners don't know that they have the opportunity to partake in accelerated depreciation through asset separation, or they think it costs more than it saves. Since the website is free, that takes away that disadvantage, so bottom line, accelerated depreciation is available to those that want to take advantage of it.

The next issue is depreciation recapture. You pay capital gains at 15% but will have to recapture Depreciation deducted at 25%. Some people frown upon this, but for me, its not even an issue.

Have you ever heard the saying "a dollar is worth more now than it will be in ten years?" Well lets talk real figures. Say I own 5 residential rentals, each having $20k in five year assets. By using segmented depreciation, my deduction will increase by $20k a year for the first five years. ($20k 5-year asset = $4k deduction per year, times 5 houses = $20k deduction a year for the first five years, separate from property depreciation altogether)

This process will save me a couple thousand dollars at least, and will probably be the deciding factor in whether or not I can afford to purchase another investment property.

More cash flow now is more important than paying taxes later, all real estate professionals know this. Besides, if you do a 1031, you can avoid paying on the depreciation re-capture altogether.

Is this making sense? The advantage really depends on your specific circumstance. I can give more examples if you'd like....

Andrew Bitler

Jeff Takle · Answer

I've been curious about this for several years myself. I saw the clearest presentation of the concept in Jeffrey Taylor's book, Landlord's Toolkit, which I think was clearly a notch well above the other rental property books out there for tips and tricks and mindset. His book even has a worksheet.

I like to test my sources though, so took it to my tax attorney just this week (hadn't seen this post yet).  His answer reflects Andrews -- you can do it but, basically the real money you'll "save" is only a couple hundred dollars, money that would be offset right now by the increased tax preparation costs. Or do it yourself for maybe 8 hours of research / preparation.

BUT, the kicker is that you don't "make" the additional money in tax benefit, you just borrow it temporarily, because you will have to effectively pay it back through recaptured depreciation when you sell so the real calculation is:

[b]Additional current year (CY) deductions x CY income tax rate = CY cash "savings"

&

CY cash "savings" x interest rate x # of years between when you claim the accelerated deduction and when you sell = real net benefit.[/b]

OR, increasing deductions by $4,000 probably "nets" you $1,000 in current year cash benefit...but you'll have to pay that $1,000 back to Uncle Sam when you sell.  So the only real net benefit you gain is any interest you can gain on the $1,000 between now and when you sell. At best, let's call it $100 per year in benefit. Most likely it isn't worth the increased tax preparation costs--in time OR money.

N/A N/A · Answer

I actually was able to contact one of the guys at the website, anyone that has any questions comments or feedback should contact REMOVED BY MODERATOR He took very kindly to my suggestions and said that they would be implemented within the next month. I found out that the site is still very much within the developmental stages, they just launched in January 2007 and they have intentions of coming out with several different applications specifically related to real estate and taxes. This site was a life saver for me, and I recommend it to any other small real estate investors out there like myself. 
TheTaxMan says that that cost segregation is out of the question for properties (less than a million) because the overall benefit does not exceed the time money and effort required to conduct a cost segregation for accelerated depreciation.
But for individuals like myself that like to take advantage of taxbreaks without the burden of accountants, this website is certainly the way to go.

I recommend that everyone be quick to take advantage of the website. REMOVED BY MODERATOR tells me that the site was not intended to be completely free, and is only going to be free until the website is fully functional by the end of tax season. Matter of fact, he says that he's surprised people are even using the site because the company has not yet marketed and opened themselves up to the public. 
Oh well, I guess that's good news for me. Looks like the earlybird takes the worm...

Andrew Bitler

N/A N/A · Answer

Andrew, your lawyer was talking about a cost segregation study.

It involves identify and separating short life assets from your new property basis and depreciating them separately, thus accelerating depreciation.
For example, you can depreciate a 200k property over 27.5 years, OR
Using cost segregation, you determine that you have 20k in 5-year assets within the home(carpet, fridge, AC, etc...)
You can depreciate the 20k in assets over the next 5 years and depreciate the 180k for the property over 27.5. From the assets alone I increase my deduction by 4k a year for the next 5 years.(the house depreciation deduction doesn't get much smaller going from 200k to180k)
This allows you to get a larger depreciation deduction, so you have more money now and not over the next 27 years.

From my understanding, you've known what to do all along, you just don't know how to go about doing it. Normally I would tell you to talk to your tax man, but unfortunately they dont always know everything either and they charge you anyway. And cost segregation isn't the cheapest thing in the world.  You can do your own form 4562 and print it out for free to give to your accountant. That way you can accelerate your depreciation while limiting your taxpreparation fees. Hope that helps.

Chris Novak

John Harris · Answer

I just did a quick google search of "accelerated depreciation" and found tons of info.  The term was only vaguely familiar to me from college accounting classes so you'll probably get better explanations from google.  Good luck.

Accelerated Depreciation? Anyone?

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