TOM WHEELWRIGHT | This Is Why Depreciation Is Like Magic

I think depreciation is like magic.

When done properly, it can take rental real estate with positive cash flow and turn it into a loss for tax purposes.

ATTENTION CPAs!

You’re invited to The CPA-Revolution Masterclass with me.

This is a 3 day, transformative educational experience, custom-built for CPAs.

(Plus it includes 20 hours of CPE credit – for FREE!)

Dec 6-8, 2018

Click below (or click here) to learn more.

Learn More and Register

It’s common to break out land and building in a rental property for depreciation purposes, but there are many more components to consider. These additional components may include appliances, parking structures, landscaping, furniture, fixtures, and much more. Most importantly, these additional components can be depreciated much faster than land and building.

The result is accelerated depreciation which means more depreciation can be taken sooner.

Keep this in mind: Accelerated depreciation is a long term strategy

The decision to accelerate depreciation should be part of a long term tax strategy. While the tax benefits can come immediately, there needs to be a focus on the future to truly maximize the benefits.

Accelerated depreciation often results in more gain when the property is sold.

On top of that, the depreciation taken may be recaptured when the property is sold which means a portion of the gain (the portion attributable to the depreciation) may be taxed at ordinary tax rates.

So how is any of this good news for accelerated depreciation?

Here’s how. The worst case scenario with accelerated depreciation is that the tax is deferred to a later year. You take the bigger deductions now, enjoy the tax savings now and then pay tax on it later in the form of more gain.

If you’ve heard me speak, then you probably know deferral is my least favorite type of tax planning, so you may be wondering why I think accelerated depreciation is so important in a tax strategy.

The reason is that deferral is the worst case outcome, and as far as tax planning goes, while deferral isn’t my favorite, it can still help minimize taxes. So even the worst case scenario is still good for tax planning.

But even better, there are other possible outcomes that can reduce or eliminate the future tax impact of accelerated depreciation.

A long term strategy is the solution to minimizing or eliminating the future tax impact of accelerated depreciation.

Here are a few examples:

Strategy #1

Not all depreciation recapture is taxed as ordinary income. Some depreciation recapture has a lower tax rate. This means you take the deduction at a higher rate and report the income at a lower rate – this results in permanent tax savings.

The key is making sure you are in the right tax brackets now and in the future.

Strategy #2

Another example is using like-kind exchanges in your long term tax strategy. With like-kind exchanges, it is possible to avoid depreciation recapture entirely.

Strategy #3

If your long term strategy is to hold the property and pass it to your heirs, then that can work to avoid depreciation recapture.

Strategy #4

A plan to regularly buy rental property can provide a steady source of accelerated depreciation and compensate for lower depreciation on properties entering the older stages of their depreciable lives.

While there can be many traps with accelerated depreciation, there are also many ways to plan around them with a long term strategy.

Dec 6-8, 2018

If you already have a trusted tax advisor…

..be sure to tell them about my FREE, 3 Day event just for CPAs, the CPA-Revolution Masterclass. Just forward this email, and click here to learn more about the event.

We’ve updated our Terms of Use – click here to review them now.

Tom Wheelwright, CPA

To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. If you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.

Unsubscribe

WealthAbility
1501 W Fountainhead Pkwy #650
Tempe, Arizona 85282
United States
(480) 565-8000

Be the first to comment on "TOM WHEELWRIGHT | This Is Why Depreciation Is Like Magic"

Leave a comment

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.