2008 year end tax planning tips

2008 year end tax planning tips

Arcane Income Tax Council

Sam sold 2 commercial in June 2008 and was planning to discuss with your tax accountant and supplier the costs of segregation. The sale price of properties was 5.2 million and 3.3 million dollars. Sam had two properties for about 8 years. Specialist segregation Sat estimated costs could save more than $ 175,000 in 2008 taxes on income. This is achieved by segregation of costs and the "recovery" previously reported under depreciation.

Sam has a passive income of oil and gas and real estate. Sam is now in property management and is actively involved in managing their investments property. Sat net income of the Company Asset Management is about 400,000 per year. The interesting question is how to reduce taxes Sat on income over $ 175,000 after selling the properties?

Arbitration Tax Rates

Sat profits tax rate arbitrage. The rate of income tax revenue for Sam is 35%. The rate of capital gains is 15%. Sam has not been a study of segregation costs when it acquired the property for 8 years. Therefore, it was reported very little depreciation and unknowingly paying excessive taxes. By claiming the return of tax depreciation in 2008, which is able to use other (catch-up) of depreciation to reduce income as if he had been assigned to depreciation during the period from 8 last year.

The analysis of segregation Preliminary cost, Sam had underestimated the depreciation of real estate over the past 8 years by $ 885,000. Arbitrage between the tax rate the standard rate on income (35%) and capital gains rate (15%) is 20%. SAM can reduce your taxes in 2008 for $ 177,000 ($ 885,000 times 20%) claiming depreciation unspent in previous years. (Precisely the correct calculations are more complex, but the end result is very similar.)

What segregation of costs?

Cost segregation is simply an accurate way to allocate the cost basis of property and establish a repayment schedule. The schedule of amortization of property is often determined by allocating a portion of the cost base to land distribution and the balance a long period of long-term recovery of depreciation (27.5 or 39-yr straight line). Cost segregation and adapt their repayment schedule by identifying the elements of short duration. Usually can be amortized in 5, 7 or 15 years. When preparing a cost segregation report, an appraiser or engineer to visit the property and to identify, quantify and evaluate the quality of different types of short term assets. After the visit the assessor will literally be a baseline cost for each element of short life, from the date of acquisition. In a typical intervention, there may be between 35 and 50 types of depreciable property items Short Life 5, 7 or 15.

What are the elements in the short life?

Some common elements are the short life of carpets, vinyl tiles, blinds, installation Landscaping, fencing and paving. Other, more modest, are the infrastructure of underground utilities, storm drains, plumbing and specialty electrical, etc.

Cost Segregation Myth

Many real estate investors and even some preparers of tax returns believe cost segregation simply deferring taxes on income. Their concern is that this will create an excessive tax bill when the property is sold. However, the concern is unfounded. Cost segregation provides a net reduction of taxes on income (based on the difference between the rates of income and capital gain rates). While the taxpayer is the tax deferral on the tax rate on ordinary income is increasing taxes when selling rate of capital gains. Net earnings increased approximately 20% reduction in the tax depreciation total.

Of course, cost segregation using When a property is sold does not include the benefits of deferral. However, the benefits include substantial tax reduction based on the discount amortization.

Council Tax Unknown

Depreciation underestimated in previous years can be claimed within one year without the submission of any amended income tax. In He also said net depreciation in previous years can be claimed within one year. This is a relatively recent, established in 2001-19 Rev. Proc. Adjustments for depreciation used to divide evenly over 4 years.

Under the amortization is reported in the current year ( "year of change") using Form 3115 (form of change in the method of accounting). The 3115 Thus, for segregation of costs has been designated by the IRS that the consent of a "automatic" change in accounting methods.

Simple example

Sam segregation cost reports documenting the 5, 7 and 15 years of ownership their properties sold recently. The cost segregation reports Sam indicated underestimated depreciation in earlier years by $ 885,000. This additional depreciation reduces taxes on ordinary income and the increase of Sam tax on their capital gains. revenue dropped $ 309,750 ($ 885,000 times 35%). The capital gains increased by $ 132,750 ($ 885,000 times 15%). Net tax savings are $ 177.000 (309.750 $ 132,750 dollars less).

Is this legal?

Of course, like Sam voluntarily government a loan of $ 177,000. Sat Uncle Sam borrowed money by overstating its net income because it underestimates their depreciating property. Sat certainly never borrowed money from the government U.S. intentionally for 8 years to 0%. The only thing worse than Uncle Sam to loan at 0% is maintained allowing manager.

Why Did not My CPA Recommend?

The federal income tax is complex, there are many nuances. It must be said that no person is an expert in all aspects of the Tax Act of the United States. Cost segregation has also changed considerably over the last 10 years. It uses cost $ 20,000 + for a simple study of the costs of segregation. In addition to reducing costs, the benefits of segregation costs have been better understood. But even there the return preparers who think that segregation costs back, which simply defers payment of taxes.

In addition, the author believes that revenues from the preparers of tax returns is erroneous. They are paid fixed fees to complete the forms. In addition to customer loyalty, there is little incentive for tax preparers to focus on reducing taxes. The question Remuneration is exacerbated by the burden of maximum work before the deadline for filing taxes. Customers want to visit with the preparer taxation where their cargo is being advanced treatment and is least able to give focused attention to individual customers.

Is it reasonable for me?

You must answer a few questions to determine if getting a study of the segregation costs will reduce taxes income. The first question is whether you pay taxes on income. (It is difficult to reduce taxes below $ 0.) The next question is: What kind of revenue. Is it passive or ordinary. If the rent is normal depreciation may be claimed as someone who is "materially participated "The immovable property, or as a professional real estate depreciation. Additional certainly can be used to offset passive income. materially participated is a technical term. Please consult your accountant or tax preparer on this issue. There are also limits Regarding its base at risk. You can deduct the depreciation to offset ordinary income, if you are a real estate professional. In general terms, this means that their daily work is related to real estate. This includes real estate agents, mortgage brokers, the Personal Business Lawyers Title real estate and others.

The next step is to determine how much depreciation can generate additional net impact of additional depreciation. A consultant experienced segregation of costs must be able and willing to provide a preliminary analysis of additional depreciation, to assess the tax consequences on income, gains and evaluate the consequences. provide the information you need to make an informed decision.

Conclusion

The United States Byzantine tax code income is too complex for anyone to understand completely. A lower tax rate and higher minus deductions benefits taxpayers and the economy. However, for now, the tax code is cumbersome, complicated and convoluted rules of logic. Legally reduce taxes on rent is possible. However, it requires planning and a team effort.

O'Connor & Associates is a national provider of business services real estate consulting including studies of segregation cost of Tax reduction, due diligence, renovation to update the cost analysis, Dallas reductions in federal taxes, tax review and inspections of apartments.

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2008 year end tax planning tips

Tagged with: 2008 • finance • tax

Filed under: Tax Planning

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