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Buried Treasure

November 28th, 2011   /   posted by Susan

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We’d all like to find buried treasure.

In the parable of “the pearl of great price” a man sells everything he owns in order to buy the land that contains buried treasure, or the “pearl of great price”.  As the parable speaks of the tremendous value of salvation; it also portrays the typical response to someone trying to capture newly discovered hidden value.

As a Real Estate Investor, you may find that great value lies within your investments.

Let me encourage you to consider the following strategies (part one of a two part blog entry) to take hold of the valuable tax savings possible for your real estate investment.  Please give us a call, if we can help you accomplish your goals in any of these areas.

  1. Cost Segregation:  In laymen’s terms, cost segregation separates your long-term fixed asset into its structural {Sec .1250} and personal property {Sec. 1245} cost segments.   The shorter useful lives of the personal property segments accelerate your deductible depreciation expense.  For instance, you own a commercial office building, steadily depreciating it over the acceptable 39 year lifespan allowed for non-residential real property.  After a cost segregation analysis, the building is broken down into parts with shorter life spans, of 5, 7 or 15 years, depending on the component.   The basis of the asset is now spread over a shorter time period, thereby increasing the depreciation expense deductible to you in the current year and lowering your taxable income.

    If you currently own a large, expensive building, or are planning on purchasing a large, expensive building, you should consider having a qualified cost segregation study performed.  Make sure the study is conducted by qualified engineers or a firm specializing in cost segregation, and you, too, can uncover the value of increased deductions and the subsequent tax savings.  

     
  2. Conservation and Façade Easements:   A contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes that are protected in perpetuity can produce a charitable contribution deduction {Sec 170}.  If you place restrictions on the property’s use in perpetuity, then you have a conservation easement, which may also be deductible.  Certain conservation criteria must be met in order for the contribution to be deductible.  Some of those criteria include protecting the natural wildlife habitat or preserving open space for scenic enjoyment of the general public.  In addition, specific requirements of Sec. 170 must be met in order for the donation to be deductible.  These Sec. 170 requirements include substantiation of the gift (by the organization) and of the gift’s fair market value (by a qualified appraiser).  However, these criteria and requirements having been met, you have a valid contribution deduction to offset taxable income.

    The proper valuation of the contributed property is vital.  In addition, you must provide proof that the public benefits from the contribution and that the donation reduces the subsequent value of the remaining real property.  You must be careful to abide by the restrictions set forth in the easements, and in the case of façade easements, the building must be a certified historical building, and you must agree not to change the exterior of the building. 

    Many people are unaware of this strategy, or are unwilling to take the steps to accomplish it. However, if you are a Real Estate Developer, own property in Historic Locations, or are considering either, you should investigate Conservation and Façade easements to unearth valuable tax savings.   

In the next installment, we’ll discuss the Rehabilitation Tax Credit, Like-kind exchanges and Passive loss provisions. 

IRS Circular 230:   To comply with certain U. S. Treasury regulations, we inform you that any U.S. federal tax advice in this communication (including attachments) is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.