Accelerated Depreciation?

General Real Estate Investing
1

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. A lawyer told me to accelerate depreciation on my properties, but I didn’t want to have to pay him 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?

2

talk to a CPA - pay for the needed advice.

it’s a tax election. it’s not rocket science.

don’t sweat it. if memory serves me right (and it usually doesn’t) :biggrin
i think it has like numbers in it…175 or something.

i’m not a cpa - obviously…

what type of “big problems” do you have? :banghead

3

Andrew,

With rental property. the structure is depreciated over 27.5 years – only the structure, land can not be depreciated. Since the late 80s, the tax code has only allowed straight line depreciation for rental property.

As a general rule, there are three separate asset classes that may apply to a rental property and each has its own depreciation schedule.

First is the structure, itself. Depreciation schedule is 27.5 years. If you purchase a property and complete a rehab, the cost of the structure and the cost of the rehab are totalled to determine your basis for depreciation. This amount is recovered through depreciation over 27.5 years.

Second is landscaping. Depreciation schedule is 15 years. If your rehab property also required landscaping – such as new sod, trees, shrubs – the cost of the job can be recovered through depreciation over 15 years.

Last is personal property. Depreciation schedule is 5 years. Let’s say you install a refrigerator, range, washer, dryer, even area rugs for your renter’s use. These items are personal property whose cost is recovered through depreciation over 5 years.

Many investors don’t take the time and effort to allocate their purchase price among these asset classes. Instead, they just take all the asset classes as part of the structure and depreciate the total over 27.5 years. When something needs to be replaced, then the investor will create a new depreciation schedule just for the new asset.

Perhaps your attorney was suggesting that you “itemize” the assets by class, allocate your purchase price among these asset classes, then, depreciate accordingly. This is “component segregation”. A good CPA should be able to help you through the process.

The depreciation schedules for all asset classes that apply to your rental property can be found in the IRS publication on Depreciation at the IRS website.

4

Andrew, your lawyer was talking about a cost segregation study.

It involves identify and separating short life assets from your new property basis and depreciating them separately, thus accelerating depreciation.
For example, you can depreciate a 200k property over 27.5 years, OR
Using cost segregation, you determine that you have 20k in 5-year assets within the home(carpet, fridge, AC, etc…)
You can depreciate the 20k in assets over the next 5 years and depreciate the 180k for the property over 27.5. From the assets alone I increase my deduction by 4k a year for the next 5 years.(the house depreciation deduction doesn’t get much smaller going from 200k to180k)
This allows you to get a larger depreciation deduction, so you have more money now and not over the next 27 years.

From my understanding, you’ve known what to do all along, you just don’t know how to go about doing it. Normally I would tell you to talk to your tax man, but unfortunately they dont always know everything either and they charge you anyway. And cost segregation isn’t the cheapest thing in the world. My recommendation would be to do more research, and try visiting DepreciateEm.com. That’s what I tell all my clients. You can do your own form 4562 and print it out for free to give to your accountant. That way you can accelerate your depreciation while limiting your taxpreparation fees. Hope that helps.

Chris Novak

5

Thank you so very much for the advice, the website is a lifesaver!
It accomplished all the things I needed to get done and it even printed out depreciation reports for me to hand to my accountant.

Is the website like an inside trade secret or something? You would never be able to find it by searching… and how is it free? Don’t companies charge a lot of money to do a cost segregation?

6

The website is fairly new, still very much so within the developmental stages. I believe the company launched in Jan 2007 and they plan on coming out with several different tax applications for real estate investors. If you have questions you can contact Kevin.White@trexglobal.com, he took very kindly to my comments and feedback.
I certainly wouldn’t recommend the site for us larger investors, doing your own cost segregation study on a five million dollar property will probably land you in some trouble. Guys like myself just pay the money to avoid the trouble.
But for guys like yourself (I’m assuming you don’t own commercial property) that probably own a few houses that you rent out, the website is great. I don’t know of any other place where you can take advantage of these services for free, and I think that is really important for small guys.
I certainly agree that the site agrees with the company’s intention of “empowering small real estate investors.” So far I haven’t run into any other companies like this one that are specifically interested in serving small investors, but maybe some things are too good to be true. My advice would be to make a move on it quickly though. I hear the website isn’t going to be free forever.