New IRS Regs Target Real Estate Investors

[Eric M.]

FYI, I have no connection with the author of this and no knowledge of this subject.  Just on their mailing list and thought I would pass this along.

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The headline says "real estate investors" but the truth is that these new IRS rules became effective onJanuary 1st for anyone who has property they might need to repair at some point.

The news isn't good.

These rules have just made it a lot harder to take a repair deduction if you fix something on your investment property. If you don't get the repair deduction, you have to capitalize the expense as an asset and then depreciate it over time. That means you might spend $10,000 to repair something, only to find out you can only take a deduction for a few hundred dollars.

If you're watching your cash flow, this could be very expensive for your business or real estate.

In today's USTaxAid alert, I'm going to go briefly over the new rules. For more information stay tuned to the blogs at USTaxAid. I'll go over the new rules in more detail this next week and give you some strategies to help you get ahead of a potential problem. There could actually be a silver lining to all of this.

Let's look first at how it used to work if you had a building for rent or for your business. The building was considered one structural component. If you made a repair that seemed significant by itself, it wasn't when you took into account the entire property. There is often a fine line between improving a property and increasing its value versus repairing to keep something essentially the same. The improvement should be capitalized. The repair is a deduction. When you're comparing the expense against the entire cost of the building, the expense is less significant.

The IRS now dictates 8 different separate components of the property. An improvement/repair is determined based on the overall value of the specific component.

There are more rules, in fact over 100 pages of them, but let's stop right here. That's because this is a HUGE win if you have property. For years, we've talked about cost segregation studies and we were very specific in what we called them. That's because the IRS shut down something called component accounting for buildings years before. There had been a lot of misuse of the tax break and so the IRS reacted strongly and shut it down. But the general principal of breaking down the different segments of your real estate. So the cost segregation study was born.

Now the IRS's new regulation requires you to divide up your property along the lines of a cost segregation study. That means you'll be able to front-end load your depreciation, if you want, to create more of a tax loss. Of course, this only works if you're able to take advantage of the loss against other income. This is important because not only does it take away the past potential issue with component segregation, but it is actually required to break down your property with something like a cost segregation study.

Like I said, there are a lot more rules to watch if you have real estate, whether for investment or in your business. There are big tax advantages, but only if you've set up your overall tax strategy to take advantage of them.

I'm taking the next two months to expand the existing Real Estate Accountant in a Box home study program. There are additional strategies, implementation tips and reporting guidelines, all designed to provide a legal way to reduce your taxes, and still sleep at night.

Warmly,

Diane Kennedy
CPA, Tax Strategist

P.S. Please check back at USTaxAid.com this next week. I'll have more details on the new IRS repair and capitalizations rule