đź’¸ TAXES đź’¸ Flashcards
What form is used to view your tax returns or designate a 3rd party to view your tax return?
4506 tax form
What tax form is used to report income or loss on a real estate property?
Schedule E (1040 Form)
For apartment buildings, what is depreciation tax benefits? Can you give an example?
It’s a tax refund for recouping the value lost from the natural depreciation of your building. The IRS allows you to depreciate the value of your building for 27.5 years (Your property value split up over 27.5 years and that number is how much you can use to reduce your taxes). You can depreciate 80% of its value because 20% of a building’s value is based off the land value which cannot “physically” depreciate.
Ex. You have an apartment building worth $1M you’re able to depreciate it over 27.5 years meaning each year you can write off ($800k/27.5) = $29,090 per year… if you’re loan payment had a principle of about $14088 and your profit after debt service is around $34168 you can be left with only a (($34,168+$14,088) - $29,090) = $19,166 taxable income instead of $48,256!
*you don’t get taxed on interest
What is cost segregation (accelerated depreciation)? And what can you use it on?
You can get depreciation benefits! It’s applicable on things like land improvements, cabinets,
appliances, carpet, light fixtures, and other parts of the building,
And gets you more tax savings sooner. Instead of depreciating it over 27.5 year you can depreciate it over 5 years and it can be used on appliances and fixtures that came with the property that you didn’t even have to buy. This can bring your taxes to 0 or even yet you a tax refund check in the 10k+ range if you can show a loss for the year.
Requires a company to come in to do an independent study on what the actual cost segregation is (usually a few thousand but well worth it)
What’s depreciation recapture?
When you sell the property off, if you used accelerated depreciation you have a tax called depreciation recApture that you generally pay 25% tax on… some would say it’s not worth doing for this reason but if you think about it the tax refunds you get in the 6 figures each year are like tax free loans from the gov for you to put into buying more properties! You’ve far more increased your wealth by the time you’ve sold and have to pay the tax.
