If you’re a real estate investor, the days of simple guidelines for expensing a cost or capitalizing or depreciating it are over.
The good news is that the regulations contain several taxpayer-friendly features that enable property owners to expense many big-ticket items that, in the past, were normally capitalized.
The bad news is that there are new, more complicated rules that the IRS requires you and your CPA to use when deciding whether to capitalize or expense.
For example, I’ve had several clients buy new roofs for their buildings and they were able to expense them instead of capitalizing them as they would have before these new regulations hit.
In the past, accountants generally set dollar thresholds for expensing vs. capitalizing. If a costs were over a certain dollar amount, they advised capitalizing and depreciating it, otherwise, expense. Pretty straightforward.
Beginning in tax year 2014, the IRS introduced new regulations that provide a more complex framework for determining what may be expensed and what must be capitalized. There are several layers of decision logic to consider (see my infographic), although there are some “Safe Harbors” that give a “free pass” to expense costs in certain situations, including costs not exceeding a flat dollar amount. Above that amount, things get complicated.
The new regulations, called the Repair and Capitalization Regulations, are often nicknamed the “Tangible Property Regulations,” or “TPRs.” For real estate owners and investors, they are the biggest change in fixed asset accounting in many years.
I give an hour long continuing education course to CPAs on this topic, but I can give you a quick synopsis, and links for further reading if you want to dive deeper (and I encourage that because it’s important to avoid missing out on potentially large deductions).
The partial disposition situation, as well as others implied by the above rules, have created new uses for cost segregation studies. In essence the cost segregation study has become the tool to make use of the taxpayer-friendly features of these new regulations by providing data needed by accountants to document tax treatment of repair and maintenance costs, non-material additions and partial asset dispositions.
Here are four ways real estate investors can avoid overpaying their income taxes:
Not every property owner will benefit to this level, but one of my clients saved over $6 million in income taxes by hiring my firm to identify qualifying assets and help them justify the write-offs made available by these new regulations.
If you own and invest in commercial real estate or apartments, and have not yet mastered these regulations and taken advantage of them, please download my whitepaper, attend my webinar to learn more, or contact me for a complimentary consultation and review.
Jeff helps real estate owners increase their cash flow. He started his career as a Financial Analyst with the Irvine Company, and worked in various management/executive positions in the mortgage industry for many years. He's been a Cost Segregation consultant for several years and is considered one of the industry's top experts in TPRs. As Director of Business Development for Bedford Cost Segregation, Jeff helps his clients increase cash flow by accelerating their depreciation deductions, and by writing off assets that no longer need to be depreciated under recently changed tax rules. Jeff has a B.S. in Economics from Claremont McKenna College and an MBA with an emphasis in Finance from UC Berkeley.
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