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Tax Strategies for Real Estate Investors

By Sean M. Hugo, CPA
Investing in real estate can be a very lucrative venture. However, there are many pitfalls that can cause investors a lot of sleepless nights. Sean M. Hugo, CPA, PC has extensive experience in dealing with real estate investments so you can sleep soundly knowing you made a smart investment.

 

Tax Strategies for Real Estate Investors

The tax code is favorable to real estate investors - there are several tax savings strategies offered by the tax code that benefit the real estate investor. There are two main reasons investors are drawn to make real estate investments, and the first is that real estate qualifies for a 1031 Exchange.

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1031 Exchange

In simple terms a 1031 Exchange is where one property is swapped for another like property in a tax deferred exchange. Notice it is tax deferred and not a tax free exchange. For example: if you have a property with a tax basis of $1 million and sell the property for $1.2 million, if you do a 1031 Exchange and buy another property for $1.2 million the tax on the $200,000 profit will be deferred.

When will the deferred tax be due? The tax will be due once you sell the property as long as you don't do another 1031 Exchange. There are a lot of very specific steps that must be followed exactly in order to execute a 1031 Exchange - this was just a summary of the tax benefits that can be obtained and not the complete list of 1031 Exchange rules.

Cost Segregation Study

Another tax benefit the tax code offers real estate investors is what is known as a cost segregation study. Commercial real estate is depreciated over 39 years, so for example, if you purchase a property worth $500,000 on January 1st then you would get $12,821 in depreciation each year.

If you have a cost segregation study performed, the study will break down how much of the purchase price was for real property (which is depreciated over 39 years) and how much was for personal property (which is depreciated over much shorter lives, such as five and seven years). The cost segregation study will accelerate the depreciation you are able to take each year.

Which One Is Right For Me?

The decision to capitalize or expense repairs is a very complicated matter. The reason this decision is so important to property owners is that it is the difference between getting a deduction in the current year or capitalizing the amount and depreciating the repair of the life of the property. Recently the IRS has updated their regulations, and this may prove to be beneficial to some property owners in certain situations.

If you have questions regarding real estate taxation please don't hesitate to give us a call at our office at 405-759-2796.