Tag: Cost Segregation (Page 5 of 6)

Maximizing Tax Savings: A Strategy for High-Income Married Couples with Short-Term Rentals

March 9, 2023 / John Murphy

Here is a strategy I’m seeing for married couples where one spouse has a big W-2 income.

Please consult with your own tax advisor. I cannot give tax advice. I’m only sharing what I’m seeing some other real estate investors do.

Want to take advantage of cost segregation and minimize your taxes but you’re not a full time real estate pro or investor? Perhaps you’re a doctor, executive, a sales pro who has a big W-2 income who wants to get into real estate investing. Some who fit this category are purchasing STRs (Airbnbs, VRBOs) and managing them themselves. Generally speaking this would require that one’s spouse does the managing and not the person with the big W-2 income. The IRS categorizes the STRs differently from long term rentals (i.e. single family rentals, duplexes, apartments etc). The STR is considered an active trade or business. If you meet the IRS criteria as being actively involved in the property, you may be able to utilize the benefits of cost segregation and the large depreciation expense it generates to offset tax liability for the W-2 income. BTW, you don’t have to be making multiple six figures to make this work. This strategy could work for someone making less money. When I see it used, it’s often the big W-2 income earners who are doing this.

I was recently at an event where a CPA explained this strategy to a room full of real estate investors. It was discussed that they might consider converting a rental home to an STR to be able to take advantage of this.

Let’s say you buy an Airbnb for $425,000 – purchase price plus any improvements, furniture etc. The land is worth 20% ($85,000). That is deducted that since land can’t be depreciated which leaves a cost or basis of $340,000 which can be cost segregated. Depending upon the property, the study results would likely show that 20-25% of the $340,000 basis could be accelerated. That is $70,000 +/- in depreciation expense that could be used to lower you and your spouse’s overall income by $70k. If your tax rate is 32%, that’s over $20,000 in income tax savings. The study might cost $2,500 +/- which is a deduction. This is a 10x return – 1,000% return on your investment. If you were to scale this up to say $1,000,000+ Airbnb, just multiply these tax savings by 2-3x and you can see why people do this.

If you are one of those couples who has a big income and wants to use real estate to help reduce your tax liability but neither of you are a full time real estate pro, then discuss this strategy with your tax advisor. If you fit this description and you have a short-term rental, reach out to me for a no cost, no obligation estimate. You’ll then have solid information to go back to your tax advisor to determine if doing a cost segregation study might end up saving you a small fortune on your income taxes.

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Cost Segregation in South Carolina

February 10, 2023 / John Murphy

Photo Credit: John Murphy, Cost Seg Building

If you’re a building owner or a tax professional, CPA, Enrolled Agent, etc., and you’re looking for a cost segregation specialist here in South Carolina, I’m happy to be of help. I’m based out of Greenville, SC and represent Cost Segregation Services, Inc. The company has been studying buildings for 20 years. During that time we have successfully completed more than 35,000 engineering-based cost segregation studies across all building types and classes in all 50 states. While I’m based in South Carolina, I can study any buildings anywhere in the U.S.

Here’s a short video on what we do for building owners.

Cost segregation works on all types of buildings where the owner is receiving a lease or rent payment. In other words, it can’t be your personal residence. Typically the basis or cost needs to be north of $200,000 in order for the economics to work for the owner, but we have done some studies on buildings with a basis as low as $150,000. This works on commercial buildings, retail strips, self storage facilities, hotels, apartments, single family rentals, Airbnbs, short term rentals, offices, warehouses, industrial, shopping centers etc.

Call me at 864-276-1448. I can provide a no cost, no obligation quote so you can discuss it with your tax advisor to see if doing cost segregation makes sense for you financially.

Chick-Fil-A Woodlawn Road Charlotte Proposes 3 Lane Wide Drive-thru to Help Traffic Back Up – Partial Asset Disposition Opportunity

January 17, 2023 / John Murphy

Image: Google Street View of 1540 E Woodlawn Road, Charlotte, NC – Chick-Fil-A Restaurant

It’s a common issue many of us have seen whereever there is a Chick-Fil-A…cars backed up into the main roadway as they wait in line to place their order for food. Chick-Fil-A has really mastered the art of the drive-thru and during and after Covid, they were the first that I saw that doubled up their drive-thrus expanding capacity. McDonalds had kind of done that over the past few years but CFA had taken it to an entire new level.

Now they are looking at going 3 wide instead of 2 wide in their drive-thru lanes. This is an attempt to deal with the complaints of traffic being backed up along Woodlawn Road in Charlotte during meal time. Chick-Fil-A is proposing that they go full on drive-thru only operation and eliminate dining to only have room for 3 drive-thru lanes and keep more traffic on their property rather than spilling out onto Woodlawn. According to the article in Axios Charlotte, this has caused a conundrum for city planners and council because they want a community that is more walkable and less dependent upon the automobile. In this case, in order to possibly improve the situation of the traffic congestion, it only ends up making the business more dependent upon the automobile. That said though, I think the public has spoken regarding Chick-Fil-A and in most cases, people just can’t get enough of it and because CFA does such an awesome job with their service via the drive-thru that people continue to frequent their stores and opt to get their food that way.

Since this blog is about cost segregation, this project will be an exellent opportunity for partial asset disposition (PAD). Because part of the building will be removed, we would calculate what that value is and what the remaining basis is on the books and get that removed from the books. It’s an immediate tax deduction in the year in which the work was done and then that amount is also removed off the depreciation schedule for the building so the owner doesn’t have to worry about paying recapture tax on that property that is no longer part of the building. It’s kind of a double tax savings but it’s a use it or lose it tax benefit. A partial asset disposition must be taken in the tax year in which the work was done. If you don’t file it in that same tax year, you cannot amend your tax returns to claim the deduction.

The company that appears to own this Chick-Fil-A at 1540 E Woodlawn Road, Charlotte, NC looks to be Charter Venture LLC. I don’t know if they are considering doing a PAD or not.

IRS Audit Technique Guide for Cost Segregation – Updated 2022

January 16, 2023 / John Murphy

Sometimes I will occassionally get a question from a building owner and/or investor as to whether or not cost segregation is a legitimate tax strategy. I will let them know it’s been law for well over 20 years now and in fact the IRS publishes a guide for its auditors to evaluate cost segregation. The IRS just published a new cost segregation audit technique guide. It had been many years since the last one was published. It’s 268 pages in case you’re interested in reading it :).

From the IRS document…

This Audit Techniques Guide (ATG) has been developed to assist Internal Revenue Service (Service) examiners in the review and examination of cost segregation studies. The primary goals are to provide examiners with an understanding of:

• Why cost segregation studies are performed for Federal income tax purposes;
• How cost segregation studies are prepared;
• What to look for in the review and examination of these studies; and,
• When certain issues identified in the cost segregation study need further
examination.

The ATG was originally developed by a cross-functional team of Service Engineers and Revenue Agents. It was updated by members of the DCE PN and is not intended as an official IRS pronouncement. Accordingly, it may not be cited as authority.

So if you wonder if you should hire a reputable and trusted firm for cost segregation for your building / investments, just realize the IRS has published a 268 page guide for its auditors to examine the accuracy of your cost segregation study.

If you’d like to talk to a firm with a long history of successfully completing these studies for building owners and investors, please don’t hesitate to reach out to me, John Murphy, CSSI at 864-276-1448.

Cost Segregation for Starbucks Retail Buildings

January 9, 2023 / John Murphy

Starbucks buildings are great to study for cost segregation. The 5 year class life is better than most retail buildings. If it's a newer developed building, often times the 15 year class life (land developments) are also significant leading to great tax savings for the owners of these commercial buildings.

Cost segregation is a terrific strategy for any commercial building owner. New retail development tends to do quite well we are finding especially in part because of the land improvements to develop the property. New retail buildings for Starbucks for example are excellent for cost segregation.

With a new Starbucks not only do you tend to see great numbers from the 15 year class life category but also in the 5 year as well as the stores tend to be finished nicely.

If you’re interested in getting a no-obligation free estimate on your building, please don’t hesitate to reach out at 864-276-1448. I work all over the U.S.

Donald Trump’s Tax Returns – Cost Segregation On Full Display

January 2, 2023 / John Murphy

Last week Congress released Donald Trump’s tax returns in hopes to find something that they can either shame him with or perhaps file criminal charges. But remember, Trump was and is a real estate developer and owner before becoming President of the United States. I remember hearing people clammoring to see his taxes but my thoughts were it’s likely we’ll see little to nothing because he probably maximizes his real estate depreciation to minimize or eliminate his tax liability. It turns out that clearly is one of the strategies he utlizes. The best ways to maximize depreciation on your buildings is by doing cost segregation.

According to the article in BisNow, Trump used a number of different strategies including loss carryforwards to eliminate his tax liability. Don’t think this can be used by the small to midsized investor? Think again. These kinds of strategies are available to all U.S. taxpayers. You just have to have a tax professional who can help you think strategically about these things as well as have a trusted source for cost segregation.

If you own an investment property or commercial building that has a depreciable basis of at least $200,000 and you have not done cost segregation yet on your building, please reach out and I will be happy to discuss this with you. We’ll run a no obligation estimate that will show you what we expect to achieve with increased accumulated depreciation and what it will cost. You can then discuss it with your tax professional and decide yea or nea. It’s that easy. We’ll collect a few documents from you as well as send someone out to photograph your property and then we’ll get started on the study. It’s pretty painless to you as the owner. It takes us six weeks to complete our engineering-based cost segregation study.

Building Owners – Did You Do a Signifant Renovation in 2022?

December 12, 2022 / John Murphy

Just a reminder for building owners and their tax professionals out there…we are the outsourced provider for hundreds of tax professionals and firms who need to get cost segregation done for their clients. We can help with partial asset dispositions on large ($100k+) renovations as well as capitalization to expense reversals. If you have clients who have buildings and if they haven’t done a cost seg study, reach out and let’s talk. We can usually make it work for a client down to about $200,000 in depreciable building cost / basis. We are still 5-6 weeks away from our deadlines to hit tax deadlines of 3/15 and 4/18/23…that time will go fast. Let’s get them scheduled.

Cost Segregation for REALTORS

December 9, 2022 / John Murphy

Cost Segregation is particularly valuable for REALTORS® as often times the large depreciation expense generated by a cost segregation study can be used to offset their income generated from selling homes. — Cost Segegation is particularly valuable for REALTORS®

Many REALTORS® own investment property and some own commercial property. If they do real estate full time, generally they can use depreciation from their real estate investments to offset tax liability from their real estate sales activity. As always, please consult with your own tax advisor to make sure you qualify for this and that your involvement with your investments is such that you can utlize the depreciation to lower your income taxes.

But let’s say you do qualify and you have the following scenario…

REALTOR® Commissions for 2022 net after expenses: $150,000. Let’s say you own a single family rental home that you purchased this year for $325,000 and the land is worth $50,000 leaving you with a building cost / basis of $275,000. When you evaluate your P&L on your rental home after deducting your expenses, debt service and standard depreciation, you end up making $2,000 net profit this year. That certainly isn’t going to create much of a tax burden for you so you wouldn’t do a cost segregation study just to save $700-$800 taxes for the year. But this isn’t the entire picture. In this situation, a cost segregation study may help you save about $15-$20k in income taxes. Let’s take a look.

If this building was put into service right away Jan. 1, 2022, your depreciation for the year would be $10,000 which is the straight line depreciation amount you can take each year for the life of your ownership or until you’ve fully depreciated the building after 27.5 years. A cost segregation study might generate a depreciation expense of about 20-25% of the cost basis which was $275,000. A study would generate a depreciation expense of about $55,000 – $68,000 which means this REALTOR could likely lower their taxable income from $150,000 to $95,000 or lower. That might be a 30% tax savings for this agent which would be about $15-$20,000. The cost to do a study like this might be $2,250 – $2,500 – net cost would be about $1,500. Pay $1,500 and save $15,000 on your taxes. This is a 10:1 ROI or a 1,000% return on your money. Not bad.

REALTORS® especially should consider cost segregation as a tax minimizing strategy if they own rental investment properties or commercial properties. As always, please consult with you tax advisor. If you have questions or would like to get a quote, please don’t hesitate to reach out to me at john.murphy@costsegregationservices.com or 864-276-1448. I work all over the country in all 50 states.

Commercial Brokers, Realtors and Insurance Brokers Should Use Cost Segregation to Grow their Business

November 29, 2022 / John Murphy

My experience is that 8 out of 10 building owners aren’t aware of this incredible tax application that boosts their cash flow and lowers their taxes… commercial brokers, insurance brokers, tax and financial profressionals and property managers are all trying to reach buildling owners and yet few if any are having conversations about cost segregation. You don’t need to be an expert. Just ask if they’ve done it yet to their building. It’s a missed opportunity all the way around.

If you don’t ask, you’re missing out on potentially really helping a client. In some cases you might gain a new client because of it. Maybe you end up writing another policy or pick up more money to invest from them. Or maybe with the extra money they save they end up buying another building with you…or you pick up a new tax client. Plus you can get paid a referral if you join our referral program. It’s easy and costs you nothing. Contact me to join our program and let’s keep business and building owners in business and profitable! Note: financial services cannot be paid a referral due to regulations. However, let’s say you help someone save $50-$100k on their taxes…perhaps they will reinvest some of that tax savings with you buying financial / life insurance products.

Dentists Can Save $100,000 On Taxes By Using Cost Segregation

November 8, 2022 / John Murphy

Dental buildings have really come a long way. We are seeing more and more of them with beautiful design and finishing. Many now cost between $1.5 – $2.0 million. That’s a big expense for anyone and especially for dentists who may well be continuing to pay for dental school loans.

If the ownership of the operating business and the LLC that owns the dental building are the same, the dentist can group these entities the first year they put the building into service. That allows the operating LLC to take advantage of the depreciation generated by the real estate LLC. The tax savings can be significant.

Many of these buildings will see 20-30% of the building cost or basis able to be depreciated in the first year. For buildings placed into service starting in 2023, the bonus depreciation drops from 100% to 80% so please note that.

Recently we saved this dentist well over $100,000 on their income taxes when we did an engineering-based cost segregation study for them.