What Do You Know About Accelerating Depreciation?
I have posted this question on other forums and have received some interesting responses. I’d like to know what the folks in this forum think.
Hello all, my name is Andrew Bitler. I am a small real estate investor with big problems. I recently joined a bunch of forums because there is an important issue I need to investigate. I am utterly confused about a certain tax strategy, so I hope you folks out there can help me out. Here is my situation:
I want to save on taxes and that’s why I invested in real estate. In 2006 I purchased 2 rental properties. I maxed out my deductions until I couldn’t find any other way to lower my taxable income. Someone told me to accelerate depreciation on my properties, but I didn’t want to have to pay more to figure out what that means. I imagine that means I can increase my depreciation deduction, but how? Anyone know what he is talking about?
More importantly, I would like to discuss this with someone who has prior experience using accelerated depreciation.
Carpet, appliance, cabinets are a few of the items that are depreciated over 5 or 7 years as opposed to the 27.5 years on most residential real esate assets
Accelerated depreciation can be taken for shorter lived assets (ie. carpet, blinds, furniture, and other items that are not permanantly attached to the property). You can also take more depreciation on qualified gulf property IF you qualify. See a tax professional and/or the IRS website for additional details - they have publications on rental properties that will assist you.
Cost segregation analysis is only available on commercial property. Engineering based cost segregation studies allow commercial real estate owners to take what would otherwise be classified as real property (1250) for depreciation purposes and reclassify it as more rapidly depreciating personal property (1245). This reclassification results in substantial cash flow benefits in both current and future years through substantially shorter depreciable
tax life and accelerated depreciation methods.
Several recent rulings have been issued by the government to spur economic growth, which can have a major impact for building owners with previous construction and acquisitions. - During 2002, the IRS automatically consents to changes in the method of depreciation via Form 3115, filed with the return in the year the change is elected. (Rev. Procedure 2002-09)
What this means to you: The IRS made it easy to change your method of depreciation to account for a cost segregation study, without the headache of an amended return. -
Following the 911 tragedies, the government allowed taxpayers to catch up on all deductions from previous years for items reclassified into the shorter tax lives as a result of a cost segregation study. (Rev. Proc. 2002-19) What this means to you: Prior to 9/11 ruling, the beneficial adjustment had to be spread out across four years, but can now be expensed entirely in the year of the change, reported as a reduction to the current year taxable income. -
In 2004, the IRS reversed the two-year waiting period required to change the method of calculation for depreciation on their property. (Rev. Proc. 2004-11) What this means to you: You can change your method of deprecation in any year.
Previously, if you purchased a property and elected to depreciate it over 30 years, you had to wait two years before changing depreciation methods and utilize a cost segregation study to take advantage of the shorter-lived personal property asset classes.
_________________
I am not a lawyer. You are encouraged to seek independent legal, accounting,
and real estate agency advice.
[ Edited by mtnwizard on Date 02/21/2007 ]
Andrew,
These books explain decomponized depreciation in details
http://www.alaiello.com/content/view/19/33/
http://www.realestatetaxlaw.com/products.php#kiss
The problem is not many Tax preparers want to do that. I have shopped 5 accountants. When I did the initial interview 2 of them they agreed to use this technique. But the changed their mind later. I attempted to use John Hyre, the author of one of the above books I mentioed above. He did finish my tax return. After all that effort, I gave up and listened to my current tax preparer recommendation. He is CPA and Tax Attorney.
It is a lifesaver for Fortune 100 companies and many of the major hotel chains, restaurant chains, etc., have already taken advantage of this tax giveaway to the rich. The required engineering analysis is very expensive and designed to keep most small businesses away from the table. For example, I know of a company that had a $1.3M tax savings. They paid $100K for their analysis.
_________________
I am not a lawyer. You are encouraged to seek independent legal, accounting,
and real estate agency advice.
[ Edited by mtnwizard on Date 02/24/2007 ]