Month: June 2009

Albert Aiello, CPA, MS Taxation, RE Investor

I am talking about the most powerful deduction for the real estate investor – Depreciation — which is an annual tax write-off of the cost basis of assets held for rental or business-use, such as real estate.

Why this “NO-cash-out; yet cash-IN” phenomena?

The first part, “NO cash out” is because the determination of depreciation is based on the entire cost of the property, regardless of how the property is financed. So you can do what is so frequently done, put little or no money down on a property and still take depreciation on the entire cost of the depreciable property. That is, you do not have to spend any cash for valuable depreciation deductions.

The second part, “cash IN” is because of the tax savings generated by depreciation, especially with componentizing (discussed later). That is you pocket the tax savings, while the property is appreciating. For example, a $20,000 depreciation deduction reduces your ordinary income. In a 30% bracket this will save you $6,000 in taxes. This is like found money because you did not have to spend any additional cash to get the deduction. The $6,000 as a 10% down payment can allow you to buy an additional $60,000 worth of real estate, which, at a 20% yearly return, would be $12,000 more income every year. Plus, like money in the bank, you get the deduction and tax savings every year (for the recovery period of the property). Yet, when you sell, you can have no recapture and thus not have to pay any of these tax savings back by selling the property, tax free, via the powerful 1031 Exchange or other tax-free selling strategies. You still continue to pocket the tax savings from depreciation! You get the best of all worlds! Get the picture? Money makes money but saving taxes (every year) makes a whole lot more money, so you can get richer, faster!!

So how can you make this already valuable deduction save you even more money? Componentize!

Componentizing (or Cost Segregation Analysis) is something that I have been using for over 25 years to dramatically increase my cash flow (and wealth) via tax savings from much larger depreciation deductions.

Reason: With componentizing, you break out components, from the property cost, that allow you to use shorter recovery periods with the result of much larger deductions and savings. For example there are many items that can qualify for personal property and be rapidly written off over 5 years (double-accelerated) instead of slower building depreciation of 27-1/2 or 39 years straight-line (or 6 times faster than the building). There are land components that too can be rapidly written off over 15 years (accelerated) instead of 27-1/2 or 39 years straight-line (or 2 to 3 times faster than the building).

Moreover, with my Goldmine system of componentizing, you can justify a low or no land value for even more deductions and savings.

Furthermore, you can also fully deduct the remaining basis of components that are replaced.

For example, if you replace existing property components with a remaining componentized cost basis of $30,000, you can claim the entire $30,000 as a full ordinary deduction. In a 30% bracket this puts $9,000 of savings in your pocket, yet you did not have to expend cash for the deduction!

So how much extra did you pay in taxes not using componentizing because your tax advisor did not know about this incredible legal strategy?

According to the follow quote from one of my students, probably a lot!

“Al, your component depreciation method saved me almost $20,000 dollars in income taxes. It helped me financially having four girls in College at the same time.” …Angelo D. Guerra, Investor, Broker/Owner, ERA Platinum Realtors, Conshohocken, PA.

By the way, that’s $20,000 a year, which if invested at 10% a year for the next 10 years would accumulate to over $318,000! But with real estate the returns are even greater; so if at 20% for the next 10 years, the savings would accumulate to over half-million dollars, which is what you are really losing without this great wealth system!!

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The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System by Albert Aiello. The specially designed forms on disk enable Real Estate Entrepreneurs to document, with tax law citations, large write-offs of depreciation and reap huge savings every year. For more information on all of the tools you need for your real estate investing business, visit Kathy Kennebrook’s website at www.marketingmagiclady.com or call the office at 941-792-5390.

Albert Aiello, CPA, MS Taxation, RE Investor

There are three major tax-saving benefits of classifying expenditures as repairs rather than capital improvements. One of them is immediate tax savings. For example, the owner of a rental property is in a 31% tax bracket and pays $20,000 as a repair is an immediate deduction which is worth $6,200 in tax savings. But if the $20,000 is capital “punishment” it must be written off over 27-1/2 years = an annual deduction of about $720 year = tax savings of only about $200 in the first year. A difference in immediate tax savings of $6,000! These tax savings could be used as an immediate source of down payment monies for other income-producing real estate.

There are over 60 tax saving ideas to convert capital improvements into fully deductible repairs! Let me share some of them with you.

Þ COMPONENTIZE IMPROVEMENTS – Just as a big forest is made of many smaller separate trees, so is an extensive plan of improvements made up of a series of smaller, separate repairs. That is, much work resulting in the “permanent improvement” to a property, in essence, consists of a series of “separate repairs”. Such repairs could be immediately deductible if documented separately. Otherwise they will lose their nature as repairs if they are part of a general plan of improvement or reconditioning. You therefore need to componentize or fractionalize the large expenditures into a larger number of smaller, separate jobs. It helps if each job is done separately & independently, over more than one year. Do this with separate invoices and separate contracts for each job. This is what the tax court said in Cobleigh, TC Memo, 1956-261.

Þ DOCUMENTS (SUCH AS BILLS & CONTRACTS) SHOULD BE WORDED AS “REPAIRS” – Use such words as: “repairs”, "prevent damage", “patch”, "temporary", “incidental", "minor", “fix”, “piecemeal", "annual", "less than a year", "decorating", "painting", "small", etc. Also, the prefix “re” is effective. For example, “repaint”, “repatch”, “repaper”, “recoat”, “resurface”, “redo”, etc. These have been in the taxpayer’s favor in deciding that expenditures were repairs.

Do the above and put more tax dollars in your pocket!

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The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. The specially designed forms on disk enable RE entrepreneurs to document, with tax law citations, large write-offs of repairs and reap huge tax savings. For more information on all the real estate investing tools and tax saving tips, visit Kathy Kennebrook’s website at www.marketingmagiclady.com or call the office at 941-792-5390