Are You Paying More Than You Should For Property Taxes?

Dec 5, 2017

You don’t have to be rich or famous to take advantage of legal loopholes from the IRS that allow you to pay less in taxes.

Owning commercial real estate is one of the best ways to build wealth and pay fewer taxes, and the more commercial investment property you own, the less you’ll end up paying.

If you’re a savvy commercial real estate investor, instead of thinking of commercial property taxes as a cost that has to be grudgingly paid, you can reap a number of tax benefits worth tens and sometimes hundreds of thousands of dollars simply by implementing several key tactics.

Lower Your Taxes Through Depreciation

chart showing lower taxes

Depreciation is the wear and tear that a building experiences over time. The IRS allows you to pay fewer taxes by depreciating the value of your property over a period of 39 years.

Items that can be depreciated in commercial real estate include fit-outs, appliances, air conditioning units, the hot water service, lights and light fittings.

Each item depreciates at a different rate. For example, the recovery period for carpets after just eight years, while a roof, which is considered a capital improvement, must be depreciated over a 39-year-old period.

There are two methods of calculating depreciation: the Straight Line Method, Sum of Years, and the Double-Declining Balance Depreciation.

Use Cost Segregation To Claim Depreciation Even Earlier

use cost segregation to claim depreciation even earlier

One way to depreciate costly items even faster than the IRS schedule is through cost segregation.

Cost segregation allows you to break up your building into its individual components. And because many of those components have a typical lifespan which is much less than 39.5 years, this can result in substantial savings.

The great thing about depreciation is that by being aware of exactly what you can claim and over what period of time means you could actually end up with a net loss on your income property, even if you made money from your property that year.

But if for some reason, you’ve never performed a cost segregation study on your income property, you can still benefit. By completing a 481 Adjustment you can claim all the missed accelerated depreciation including the present year.

Take Advantage Of 1031 Exchanges

Another way to use the tax system to your benefit is through a 1031 Exchange. 1031 is an excellent method to defer what would normally be a hefty tax bill.

Basically, a 1031 Exchange allows you to sell a property, then roll the proceeds from the sale into the purchase of another property. There are numerous rules for 1031’s, but the main benefit is that as long as the new property value is equal to or greater than what you received for the first property, you don’t pay taxes on the money made from the deal.

Gift An Asset To A Member Of Your Family

The IRS permits you to gift assets to another person in your family, as long as they are over the age of 24 and are in a lower income bracket than you are.

If the asset is then sold, it is taxed at the lower rate of the new owner, rather than the much higher rate that includes up to 20% in capital gains taxes.

Give To Charity

Donating to your favorite charity will not only make you feel good, but it also can mean that you can deduct a hefty sum from your taxes. The IRS even allows you to deduct the full amount from your taxes. What’s even better is that you don’t have to pay capital gains taxes on top of everything else.

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