Everyone loves presents, and I am no exception. Each year, I look forward to opening presents from my husband, my son, and family and friends. What I did not expect was that I would actually receive a Christmas present from Uncle Sam as well this year. In fact, you may be surprised too to find out the present that Uncle Sam may have in store for you.
What exactly am I talking about? Well, if you have not heard yet, on November 24, 2015, the IRS announced a new tax break that can save real estate investors and business owners thousands of dollars in taxes for the 2015 tax year.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
The New Tax Change
The details of the new tax change are expected to be released in the coming weeks, but what we do know is that the government effectively raised the deductible amount of depreciable assets from $500 to $2,500. As such, when investors make improvements to properties or buy assets for the rentals, we may be able to take an immediate tax deduction instead of needing to depreciate it over many years. The net result is a potentially larger tax write off in 2015 to generate a higher tax refund. Let’s go over an example.
Let’s assume Tom is a real estate investor who owns several rental properties, which are single family and multi-family units. In 2015, Tom made some improvements to his single family rental and incurred $2,000 for new cabinets and another $2,500 for new kitchen appliances.
Before the new tax change, all of the money that Tom spent above would generally need to be depreciated over many years. Instead of deducting the entire $4,500 spent on cabinets and appliances, it would generally be depreciated over a 5-year period. However, as a result of the new tax change, Tom may now be able to deduct the entire $4,500 spent on cabinets and appliances to reduce 2015 taxes.
Let’s assume that Tom’s tenants in the multifamily have been complaining about the old washers and dryers in the units. Tom was on the fence about replacing the old appliances because he knew it would be a large cash outlay. Tom was thinking about purchasing 50 washers and 50 dryers for $800 each. However, based on the old tax rules, Tom would generally need to depreciate the $80,000 asset purchases over 5 years, which delays his tax write-off.
With this new tax break, Tom is now able to potentially deduct the entire $80,000 of appliance purchases immediately in 2015 because each item is under the $2,500 threshold. Assuming that Tom is in the 40% tax bracket between federal and state income taxes, the new tax change can result in $84,500 of IMMEDIATE tax deductions increasing his refund by close to $34,000!
Significant Tax Savings
As you can see, for those of us who invest in real estate, this can result in significant tax savings for the 2015 year. The great thing about this tax change is that unlike a lot of other tax perks, this may be available for all business owners and investors, regardless of their income level. What is even better is that although the new change is official as of November 23, 2015, the benefits may be applied retroactively back to 2012. This means that for some taxpayers, this may be an opportunity to file amended tax returns to claim refunds on taxes paid previously.
So what does this mean for you? If you have not done so yet, be sure to touch base with your tax advisor before December 31st to determine the best way for you to take advantage of this new tax break from Uncle Sam.
Investors: Have you heard about this new tax change? How would this affect your real estate business?
Let me know with a comment!