Because your client can apply their $30,000 deduction to offset taxable income, they’re only paying taxes on $70,000! Passive vs.
Let’s assume your client is classified as a real estate professional, or has material participation in a commercial real estate investment, with a $100,000 salary. If your client only invested $10,000 of their own money and borrowed the other $90,000, they’ve only spent $10,000, but received a $30,000 deduction! Since many components can be written off after a cost segregation study, if your client’s purchase price was $100,000, they can deduct $30-40,000 immediately (the 100% bonus depreciation signed into law by the Tax and Jobs Act). Instead of waiting five or 15 years for the depreciation, you can take it all in year one.
THE WHOLE ART OF DEDUCTION FULL
The 2017 Tax Cuts and Jobs Act allows for an immediate deduction for the full costs in the first year. As a result, by reallocating some of the building’s assets to a five- or 15-year lifespan, they would qualify for bonus depreciation.
Bonus depreciation is allowable on any class life equal to, or less than, 20 years. If your client owns a property with a class life of 27 years, they can sometimes get a sizeable bonus depreciation in year one. Unlike the whole of a building, which is seen as having either 27- or 39-year lifespan, subcomponents are granted a five- or 15-year lifespan, making the depreciation deduction larger, especially in the first several years. With cost segregation, engineers and accountants recognize a building is not only one piece of property, but comprised of subcomponents (such as lighting fixtures, heating and air conditioning systems, and other components that deteriorate over time). Whether the property is residential or commercial, they can write off that cost either in a 27- or 39-year timeframe. If you buy a property for $100,000, in theory, your client can recover that cost in a set period. Upon purchase, your client can write off a depreciation loss to cover purchase costs. Write Off Your Depreciationĭepreciation occurs when a purchased building ages: it loses value over time. And with the deft use of tax deductions, incredibly enough, a real estate investment could be self-financing-and yield a sizeable profit as well. For your clients, owning real estate can be a major step forward in creating and maintaining personal wealth. As a CPA, are you seeking ways you can demonstrate your unique, value-added worth to clients? Consider introducing your clients to the benefits of real estate tax deductions.
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