Tag: Commercial Real Estate
Arkansas Funeral Directors Association Enlists GMG to Identify and Procure Specialized Tax Incentives for Members
Do you have a ‘Tax Preparer’ or a CPA?
Depending on your answer, you could be getting bad advice which puts more money in the IRS’s coffers (and leaves less in your pocket).
Below is the crux of a typical tax preparer’s opinion regarding Engineering Based Cost Segregation Studies which an experienced CPA would say has kept many commercial property owners from implementing this highly beneficial tax strategy which is effectively encouraged by the IRS.
Here is a typical ‘tax preparer’ statement to commercial property owners:
“You are not getting additional depreciation, you are accelerating depreciation by allocating cost to shorter life. I advise against such a strategy as there can be future tax implications and also there is upfront cost involved.”
For frame of reference, here is the IRS’ view (from www.irs.gov) on cost segregation:
“Buildings and structural components have substantially longer depreciable lives than personal property. Therefore, it is desirable for taxpayers to maximize personal property costs in order to accelerate depreciation deductions and, hence, reduce tax liability.” (source)
Here’s how many experienced CPAs would look at this matter:
The above point of view isn’t considering the bigger picture. For instance, only looking at the (potentially) negative capital gains tax implications associated with cost segregation by itself is ‘missing the forest for the trees’:
- It is not necessarily true this would be a ‘negative’ as it would depend on the ultimate sale price versus the depreciable cost basis; if the sale price is equal to or less than the depreciable cost basis then the capital gains issue is, well, a non-issue.
- There is no consideration given to the positive effect on the income tax picture due to cost segregation; this positive effect needs to be weighed against the potentially negative capital gains effect.
- In general, property owners will benefit from cost segregation if they hold the building for at least 18 months. One reason for this dynamic is that the capital gains tax, even at the 25% ‘re-cap’ rate, is much lower than the typical 35% to 39.6% income tax rate.
- There is an assumption that the property owner is absolutely giving up all future depreciation benefits in exchange for taking those benefits now. Well, if the owner never replaces carpeting, wiring, plumbing and other such non-structural components, then, ‘yes’, that would be the case. But the reality is that these components will ultimately be replaced (which is the basis for the relatively shorter/accelerated tax-compliant depreciation time-lines for such items). The associated replacement costs can be depreciated.
So, in fact, the depreciation isn’t lost in reality. Plus, only about 20% of the building can be ‘accelerated’…the remainder stays in 39-year S/L.
- In effect, this is a time-value-of-money/opportunity cost ‘play’. So an owner’s capitalization rate needs to be considered; a critical mass of money in the hands of a good businessperson NOW could feasibly produce a 10% or greater return. An owner’s ability to convert that ‘now cash’ (i.e., cash that becomes available due to cost segregation’s resulting reduction in current income tax) into more cash could easily dwarf the down-the-road bit-by-bit depreciation cost deductions which the owner MAY be passing on.
- The “upfront costs” for conducting an Engineering Based Cost Segregation Study are barely worthy of factoring into the benefits equation; first, the Study is a business expense and effectively comes at a 35% (+/-) ‘discount’, and secondly, the Study cost can often be less than 10% of the tax benefit (even without the ‘discount’). Most business-minded people would find a project with a minimum 10:1 benefit-to-cost ratio to be worthy of pursuit.
So, do you have a ‘Tax Preparer’ or a CPA? The best way to find out is to ask him or her how they perceive the value of an Engineering Based Cost Segregation Study for a commercial property owner.
To stream a 3-minute video regarding this topic, please click here.
For additional information contact us.
9 out of 10 Commercial Property Investors are Overpaying on Income Taxes
Year after year, the Federal Government has continued to incentivize those who invest in Commercial Property. The IRS has established guidelines that, if ignored, cause commercial real estate investors to pay more in taxes than they should.
What guidelines are being ignored by Commercial Property Investors?
Those revolving around Accelerated Depreciation; known in the taxation world as Property Cost Segregation.
Ramifications of Improper Depreciation Allocation
Most commercial property investors do not truly understand the substantial benefits of accelerated depreciation. This is evidenced by our analysis of thousands of depreciation schedules over the years. We have found less than 10% of investors are properly depreciating their properties. The most common misconception is, “I am going to get this money anyway”. Is this a true or false statement?
- Capital Gains vs Ordinary Income Rates
Although the mechanics of these calculations are not always as simplistic as we will be making it for this example, the short response is – increased depreciation leads to paying taxes at the capital gains rate as opposed to the ordinary income rate. Since capital gains rates are likely much lower than the Investor’s income tax rate, they would benefit from accelerated depreciation.
- Time Value of Money
Simply put, your dollar is worth more today than it will be in the future. A tax dollar saved today therefore is worth more than a tax dollar saved in the future. Why lock up a tax savings in your property for 27-39 years when you can receive it today?
- Catch-Up Depreciation
If you have not completed a Cost Segregation study on your property that you have held for a period of time, did you know that you can capture your entire missed benefit immediately? The IRS allows you to complete a 481 adjustment thus enabling you to catch up all the missed accelerated depreciation into the current tax year. This provision alone could save you hundreds of thousands immediately!
- The Power of Cash in hand
You are a real estate “investor”. This means you understand the investing power of having funds in your hand today. Cash today [in the form of tax savings] enables you to invest in additional properties. The benefits of this are exponential and allow continued growth of your investment portfolio.
Correct allocation of real estate depreciation is essential for Commercial Property Investors to effectively manage their tax situation. Are you one of the 90% who are missing out on opportunities that 10% of your competitors are capturing?
For a free analysis of your Depreciation Schedules, please send an email to firstname.lastname@example.org.
Four Reasons Why Medical Practitioners Should NOT Own Commercial Property
Keller Williams Commercial Partnership to Bring Millions in Tax Incentives to Commercial Clients
October 4, 2012 – Keller Williams Commercial, the second largest real estate franchise operation within the U.S., has partnered with Growth Management Group, LLC (GMG), a national cost recovery firm, to provide commercial clients the opportunity to gain hundreds of millions of dollars through specialized tax incentives.
Based on the synergy between both organizations, this partnership will provide clients with every opportunity to make the best investment when purchasing commercial property by reducing taxable income, improving cash flow and ROI.
This partnership will substantiate KW’s commitment to excellence which was confirmed with the 2012 J.D. Power & Associates “How Buyer/Seller Satisfaction Study”, ranking them highest in customer satisfaction.
To date GMG has discovered almost $300 million dollars in refunds and/or incentives for it’s clients. GMG’s position as a nationally recognized full service Training, Development and Cost Savings Consulting Firm with a vision to stimulate economies aligns with the same commitment to excellence that KW has established.
For more information about Growth Management Group, LLC, contact: Kendra Pelch, email@example.com (888) 705.5557, www.gmgsavings.com.
For more information about Keller Williams Commercial Real Estate, contact: http://www.kwcommercial.com