commercial re tax advantages

Commercial Real Estate

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Commercial RE Tax BenefitsMichael FisherCommercial Investment Specialist

(815) 529-7275


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Tax Benefit Topics

•Your Team

•Record Keeping

•Analyze Property Performance

•Depreciation / Cost Segregation

•Passive Loss

•1031 Exchanges

•Summary


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Your Team

•Realtor (key) – specializing in Commercial RE if buying Commercial Properties

•Other Real Estate Investors – sources of ideas and connections

•Real Estate Lenders (key) – Wendy or Don – based on type of property

•Bookkeeper (key) – Can be yourself

•Real Estate Accountant – knows the best way to manage accounting for Real Estate.

•Tax Accountant (key) – Knows how to manage and identify tax advantages. Frequently more than justifies their cost.

•Insurance Agent (key) – Keith or Rick – depending on type of building.

•Attorney (key) – Protect your assets

•Property Manager – probably yourself


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Record Keeping

•Keep Separate checking accounts for each property – makes tracking much easier and is well worth it if you are audited. Helps accountants do their jobs and saves you money in accountant fees.

•Run each property as a separate business with separate income and expenses – helps in managing profitability and determining when to sell.

•Set up your investment properties under a separate entity other yourself. LLC, Corporation, LP, etc.


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Analyze Property Performance

•Case Study: Looking to buy a $450,000 5-unit apartment building with 20% down with tenants and leases in place. Property has an operating history.

$ 90,000 Down Payment

$360,000 Bank Loan

$450,000 Property

Cash Flow

$54,000 Rental Income ($900 / unit)

$19,459 Operating Expenses

$27,341 Debt Service

$7,200 Annually

(8% Cash on Cash, $7,200 / $90,000)


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Analyze with Tax Advantages

•Passive Losses- deduct interest payments, component depreciation (Cost Segregation), Building Depreciation.

•Normal Depreciation – 27 ½ Years Residential Rental or 39 Years Commercial

•With Cost Segregation

•27 ½ Years or 39 years – Building, Branch Wiring, Lighting, Bathrooms, Ceilings, Heating & Cooling

•5 Years – all other components (Electrical Distribution, Television equip, Carpeting & Floor coverings, Hallways, handrails, doors, etc.)

•5 or 7 Year (all personal property – furniture, phones, appliances, operating equipment)


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Case Study with Cost Segregation – for Taxes

After Tax with Cost Segregation

$54,000 Rental Income ($900 / unit)

$19,459 Operating Expenses

$15,888 Interest Deduction

$15,000 Component Depreciation (5 or 7 years)

$10,909 Building Depreciation (39 years)

-($7,256) Annually

Tax Savings @35% = $2,540

(11% Cash on Cash, $7,200 + 2,540 / $90,000)


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Qualifiers

•AGI < $100,000 for full deduction

•$100,000 - $150,000 AGI – reduced deduction

•> $150,000 AGI – no deduction

Unless…

Real Estate Professional – non licensed

•Must perform half of all worked hours in real property trades or business

•Must be at least 750 hours (14.5 hours / week)

•Developing, redeveloping, constructing, acquiring, converting, renting, operating, managing, interviewing, analyzing, bookkeeping, hiring contractors, etc – all qualify


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1031 Exchanges – Tax Free Exchanges

•Must Be investment Property or used in a trade or business

•Must identify a list of new properties within 45 days (3 properties or less)

•Must reinvest the money within 180 days

•Money must be held by a qualified intermediary.

•New property must be held in name of the same entity as the old property

•Must buy equal value or higher to pay no tax

•Must reinvest all of the cash proceeds from the sale of old property.


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Summary

•Commercial Real Estate is a great vehicle for managing tax burdens and income streams.

•A Tax accountant can be a very good friend to have

•Investment property can turn a profit and still take a passive loss for tax purposes.

•A good referral for me is anyone looking to further understand the benefits of owning Commercial Real Estate for cash flow and tax benefits.