Business Development Manager at Karla Dennis & Associates INC, overseeing the Sales Department in North America. Follow me @karltondennis.
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I was recently asked by one of my clients what one powerful strategy I like to use often as a tax strategist. It didn't take me long to answer with one of the most powerful tax strategies being revealed by this cost segregation study from the IRS. In this article, I’m going to show you the power of utilizing this information.
A Case Scenario
Here is an example as to why that strategy is my favorite to use. I had a client last year who owns multiple rental properties. One of the strategies we used for her to avoid owing over $117, 000 in taxes was first creating a management company for her to leverage as a qualified real estate professional. We hired this company on her payroll, and were able to do this because she was managing her own properties. Because her children work in her management company, we were able to place them on payroll as well. In this way, we were able to get her IRS bill down to $63,000. Here’s how the cost segregation was able to wipe out the other $63,000 tax liability.
An Innovative Solution
After multiple tax strategy meetings with my client in which we sat down and drew out the strategies, we were able to get those strategies implemented. I was then afforded the pleasure of seeing tax savings happening in real time from tax planning.
The cost segregation study reveals the ability to accelerate depreciation on a residential rental property or commercial property. This makes a difference between twenty-seven and a half years of depreciation or thirty-nine years of depreciation.
You may think that's a long time, right? Twenty-seven and a half years or thirty-nine to write off an entire building?
Now the IRS is aligned to segregate out components of the property that can be depreciated in a quicker amount of time, such as lighting, flooring, appliances, paint, etc. All of these different components of the property do not last twenty-seven and a half years or thirty-nine years, so we can get the cost associated with the components of the property and segregate them out. Then we can depreciate them on a 5-, 7-, 10- and 15-year depreciation schedule, as opposed to the twenty-seven and a half or thirty-nine year options.
This cost segregation was the strategy that enabled us to accelerate the rest of the $63,000 taxes that she was going to pay. She's now just one client of ours who leverages the powerful tax strategies every single year.
Tax Compliance Versus Tax Planning
I look back at this client and commend her for seeking out information to reach her level of success in tax savings. It all started because she had first worked with CPAs who do tax compliance. These employees would take her documents (W-2s, 1099s, mortgages, interest payments, etc.), put them into their computer software and have the computer spit out a copy of the return.
Rather than continuing to work with CPAs who have their computers do 90% of the work, this client came to the realization that tax planning is where you are able to leverage IRS tax strategies in order to formulate strategies that can reduce your taxable income in real time. Tax planning is a process in which you sit down and figure out what a person's intentions are on a personal level, on a business level, on an investment level and on a retirement level. This helps you make sure you are implementing the right strategies. If you are working with a CPA who didn't take the time to ask you about all the goals that you have, but they still write off everything for you, it may be time to call them up to ask your CPA some important questions, as I've written about previously.
The Power Of Tax Planning
If you are looking to build a financial legacy and leverage some of the most powerful tax strategies available to you, make sure you speak to a licensed tax advisor who can tell you the strategies you should put in place according to your goals and vision for the future.
Property tax planning is making sure you ask all the right questions because you're helping your client build a legacy. That is the most important thing. You can't just think about where your client is right now. You have to look back to where your client has been on their tax returns as well as where they currently stand. And you need to plan for your client's future intentions so you can give them the best recommendations in real time. That's what led to our client having those tax savings, and that's what leads to so many of our clients benefiting from the tax codes.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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