Apartment owners have to reckon with high costs to receive the residential communities. The maintenance of even a modest community can include the maintenance of land, the renovation of units and the exchange of land such as asphalt for parking lots and fences. Another significant cost factor is the federal income tax – and in some areas an additional state income tax -. However, through an innovative study called cost-cutting, depreciation of real estate components can help reduce federal taxes.
Nowadays, more and more housing investors, especially those whose occupancy is being questioned by the country house, are looking at all sorts of cost-cutting opportunities. This is a frustrating task in the housing business. One historically under-used technique to save money, in this case to save taxes, is to ensure that all depreciable items in the tax returns are correctly identified.
These items are not limited to copiers, automobiles and heavy equipment. The list covers a variety of buildings and improvements. In fact, the IRS 130 recognizes items that are being amortized over a much shorter period than the standard 27.5 years amortization for a residential community. Many of these items, such as parking areas, landscaping and even certain wall coverings, are present in large proportions in typical residential communities.
A cost-containment analysis related to depreciation plans now reduces taxable income and also shifts taxes on capital gains until the community is sold. At this time, the reversal of taxes on the additional depreciation made may be at a much lower rate than the maximum tax rate of 35 per cent, which was avoided with the additional losses.
Do not forget the time value of money by moving this inevitable tax by several years. Given the 130 IRS-identified short-life items, this conservative tax planning tool can help homeowners estimate more costs for improvements of five, seven, 15, and 27.5 years compared to the real estate value of a home.
Shared apartments are amortized over a period of 27.5 years according to the rules of the IRS. This is 10 years less than the estimated depreciation for office, retail and industrial real estate, which translates into faster savings for homeowners. Items found in each home, such as carpets, linoleum, window treatments, and household appliances, are classified as five-year items, meaning that they are usually exchanged after five years of use.
Wide range of applications
Regardless of whether the community has recently been purchased, has been owned or is in the market for some time, cost-containment analysis can help at any stage of ownership by lowering federal income taxes and indicating future depreciation. The optimal time for this is preferably once the property has been acquired, regardless of whether the property was purchased or built. Any commercial property built after 31 December 1986 will be eligible and, in the first year, when a cost-cutting study will be carried out for communities that have been owned for several years, there will be catch-up provisions for higher savings.
Communities of all sizes can benefit, from small communities with less than 10 homes to communities spanning several city blocks. If the property has an estimated value of at least $ 200,000, the assessment of cost segregation can almost always lead to significant savings in federal income tax.
Preparing for a study
When you work with a consulting firm specializing in cost cutting, a small portion of the time is spent on ownership. And it is advisable that the owner's CPA or tax adviser work with the adviser to ensure the most favorable application for the owner's particular financial circumstances.
The initial purchase price of the shared apartment is the cost base, so owners receive savings on their initial investment and improvements. For both quantitative (square footage of asphalt, pavement, etc., or sets of wall or window coverings, etc.) and qualitative (assessment of residual life) examinations, a special analysis and calculation is performed before a report is made. This report becomes the backup documentation for the federal income tax return.