The first thing I was taught when I entered the real estate business was to say ‘I don’t know’ when I didn’t. I’ve followed that advice strictly from my first day in the office. I’ll say ‘I’m sorry’ in advance to all the CPA’s out there who say ‘ I don’t know’ when indeed they’re ignorant about some portion of tax law. God knows the average real estate agent wouldn’t admit ignorance to anything. How many of us blithely assume our accountant knows how to file a tax return for a restaurant as well as he does for a mining firm? Does that make any rational sense to you? Of course not. Yet, given the same question about your family doctor, you know in your heart he’d refer you to a specialist immediately if he thought you needed knee surgery.
CPA’s, in my experience, generally won’t say ‘I don’t know’ when it comes to real estate. Some do, but most seem to think all they need is the Internal Revenue Code (IRC) to correctly deal with any ignorance on their part. I found this out the hard way many moons ago.
Let me give you an example of someone I know who just last year discovered her CPA didn’t quite have her covered.
Somebody very close to me (a real estate broker) recently had her most recent corporate return audited by her best friend’s accountant. Her friend had commented on her tax bill. To make a long story short, she just cashed an IRS check for almost $15K. Overpaying your taxes $15K might concern you! This on gross revenues of $500K, not $10Mil. She was not happy her guy had left that much on the table.
I recently opened the phone book and randomly called ten CPA’s. They all said they do many tax returns for taxpayers owning one or more investment properties. They knew all about depreciation.
Four of them new what cost segregation was. Wow!
What about cost segregation? What is it exactly?
Cost Segregation, when boiled down, is a tax saving tool that allows companies and individuals who have built, purchased, added to, or remodeled real estate to increase their cash flow by accelerating depreciation deductions and decreasing their federal and state income taxes. It’s a strategic approach to maximizing your investment’s cash flow.
Engineers visit your property to conduct a Cost Segregation Study. This is to identify, set apart, and reclassify property or project related costs that are now shown as real property, to much shorter depreciable tax schedules (lives) for fed/state income tax purposes. You’re allowed to change accounting methods (with the IRS) in order to fully benefit from the increased amount of depreciation. As a matter of fact, you can go back as far as 1987 to take advantage of this. The cool part? You don’t have to amend tax returns.
Part II will show a real life example of what CS can mean to the average investor.