Optimizing Depreciation and Unlocking Your Tax Savings
Filing Your Tax Returns the Best Way
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Depreciation is a powerful tool in the real estate investor’s toolkit. As apartment investors, it is important to understand that traditional straight-line depreciation isn’t your only option. Through a cost segregation study, you can accelerate depreciation deductions, targeting specific components of your property for faster depreciation. This strategic maneuver can lead to considerable tax savings and is especially beneficial for those owning larger properties or high dollar properties. For example, if you purchased an apartment in 2023 for $800,000, first year depreciation with cost segregation may be as high as $200,000. With proper planning, the tax losses may even be able to offset your total income outside of real estate as well. You do not have to do cost segregation in the first year you purchase a property. If you purchased properties a few years ago, it is not too late to do it before filing your 2023 tax returns. Before doing cost segregation, be sure that you can confirm it will benefit you in the current tax year. Do you have a lot of rental net profit that you can offset? If not, then determine whether any rental losses can offset your other types of income like W2, business income or retirement income if you can meet the real estate professional status.
How you file your taxes can significantly impact how much tax you pay or save. Whether to opt for the standard deduction or itemized deductions, or how to report your LLC are decisions that should be made by you and your tax advisor. For example, an LLC taxed as an S Corporation structure might be advantageous for those with active real estate income, while an LLC taxed as a partnership may be better to hold rentals. If you had an entity to earn your income already in place in 2023, it is not too late now to decide how to optimally file your 2023 tax returns. It is also important to understand the passive loss activity rules to optimize your tax savings each year. Rental losses are generally passive losses in the tax world and losses can offset taxes from your other rental properties and other passive income, but it may be limited when it comes to your active income such as W-2 or business income. However, with real estate professional status, rental losses may be able to offset all types of income. So before filing your tax returns, look to see whether you or your spouse can qualify as real estate professional status.
YOU DO NOT HAVE TO DO COST SEGREGATION IN THE FIRST YEAR YOU PURCHASE A PROPERTY.
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