2008 Economic Stimulus Act…Turn $600 into $6000!

It’s worth more than $600

I’m sure you all have heard about the 2008 Economic Stimulus Act (ESA) and we are all anxiously awaiting our $600 (hopefully) check so that we can go out and stimulate the economy! After receiving the 200+ page book on the ESA (great bedside reading for you insomniacs) it is clear to me that we don’t have a clue about what our legislators are up to. And why? Maybe because we rely on the media to inform us of their goings on…maybe because the media is sure that our short little attention spans can only handle the simplest of concepts…maybe because despite the changing times, we are all convinced that we cannot affect change by ourselves. I don’t agree. If you took only one other aspect of the ESA and put it to work you would be well on your way to building or rebuilding your wealth.

Take a look at the part of the ESA that grants you 50% depreciation on items that have a tax life of 20 years or less. If you own a business and need to make any capital expenditures this year…don’t wait. With this nifty allowance you can write off 50% of the value of that expenditure (given it would normally be put on a depreciation schedule of 20 years or less – ask your CPA for confirmation) in 2008!

The really exciting part of this is that if you buy investment real estate in 2008 you can increase your depreciation deductions by as much as 150% in 2008! What does that mean exactly? Here is a great example. I have a friend that just bought a foreclosure property…he is a first time investor and he intends to fix up the property and rent it out. Not a novel concept by any means, but let me show you how to make this into simple strategy one that could build significant wealth over time.

Once it is rented he will generate cash flow on the house. Did I mention the house was in California? Okay, so he has this one house and he qualifies for the accelerated depreciation the ’08 ESA offers because he has a chattel appraisal (cost…approximately $600) done on his newly refurbished rental house. This depreciation bonus gets him very close to his $25,000 depreciation allowance for the year which means that he doesn’t have to pay taxes on $25,000 of his ordinary income in ’08. Now if he takes that tax savings (about $6250 at the 25% tax bracket) and invests it next year in another property, he is well on his way to building a solid financial future.

Now that is how to turn your $600 check into $6000! Keep that money moving and growing!

Non-Engineered Cost Seg Studies

Cost Seg Applied by Non-Engineers Equally Acceptable by the IRS

While it is a commonly held belief that cost segregation studies need be administered and executed by an engineer, the reasoning behind this opinion is actually faulty.

Cost segregation studies that were mainly produced for commercial property owners are held to an at-best sketchy legal precedent as to what is personal (1245) property and what is 1250 (real) property. Making the distinction between the two can sometimes be challenging due to the nature of complex buildings with nuanced and specialized architecture.  This difficulty led to an unfounded belief that the only valid cost seg study should come from and engineer.

 Never mind that the cost for engineered cost segregation studies can begin at $15,000.

Residential Cost Seg Studies

But in residential cost segregation studies, all that is dealt with is personal property, as it is described by the IRS. There is no messy distinction-making involved. The personal property is valued, and this third-party valuation is enough to qualify a taxpayer for accelerated depreciation (more cash flow).  So not only do you not need an engineer for a residential cost seg study, but it is questionable whether you need an actual engineer for a commercial cost seg as well.

Here is an excerpt from the IRS’ ATG (Audit Technique Guide):

WHAT METHODOLOGY IS REQUIRED BY THE IRS?

Neither the Service nor any group or association of practitioners has established any requirements or standards for the preparation of cost segregation studies.  The courts have addressed component depreciation, but have not specifically addressed the methodologies of cost segregation studies.The Service has addressed this issue but only briefly, i.e., Revenue Ruling 73-410, 1973-2 C.B. 53, Private Letter Ruling (PLR) 7941002 (June 25, 1979), Chief Counsel Advice Memorandum 199921045 (April 1, 1999).  These documents all emphasize that the determination of § 1245 property is factually intensive and must be supported by corroborating evidence.  In addition, an underlying assumption is that the study is performed by “qualified” individuals or firms, such as those employing “…personnel competent in design, construction, auditing, and estimating procedures relating to building construction” (PLR 7941002).

Despite the lack of specific requirements for preparing cost segregation studies, taxpayers still must substantiate their depreciation deductions and classifications of property.  Substantiation using actual costs is generally preferable to the use of estimates.  However, in situations where estimation is the only option, the methodology and the source of any cost data should be clearly documented.  In addition, estimated costs should be reconciled back to actual costs or purchase price.

Setting the Standard in Residential Cost Segregation 

So it is we find that our rigorous 3-day on-site training is certainly enough qualification to handle the valuation of personal property. Shamefully, we do not know of many other companies that take the time and commit the expense to thoroughly train and educate their evaluators/appraisers.

Our evaluators participate in ongoing educational outreach to investors and are continuously in front of CPAs and their clients, Real Estate Agents and Investors, teaching about the benefits of chattel and learning about the investor’s trials and tribulations. We are always supplying them with the lastest resources that will keep them abreast of what’s happening in their market. Plus, in ongoing conversations with CPAs, they continue to further refine and expand their general tax knowledge base.

For a complete list of thoroughly trained and supported Field Appraisers throughout the US, find your geographical location on the BlogRoll to the right. These Appraisers are trained with the knowledge and work with the support to effortlessly maximize the cash flow on your residential real estate investments. Their costing company is second-to-none, and is actually cited in the IRS ATG as a standard.

Due Diligence

When employing someone to do your residential cost seg study, always check that they carry general liabiloity insurance as well as E & O Insurance. Double check where they received their training, and their source of the costing data. These key indicators will readily demonstrate the calibur of appraiser with which you are dealing and can help guarantee a no-hassle pass to your next big break in net taxes.

Cost Seg Friendly CPAs

Why would a CPA from Florida be sending her clients that own upwards of 20 properties to our doorstep here in CA?

 She knows we have a nationwide service (and I mean from HI to FL–that’s seriously nationwide). She knows our costing partner has over 70 years in the industry (in cost segregation,insurance costing, and now chattel appraisals). She knows are numbers are those of integrity, and she knows we’ll get the job done for her in a timely manner.

Another CPA in Seattle has joined forces with us to present the residential cost segregation to his investor clients. He had though about providing the service to his clients through the use of proprietary software, but felt that doing so could possibly violate the IRS standard of having a third-party independent valuation of the chattel.

We are not the cheapest company out there. We are the first, however, and we are the best. www.chattelexperts.com

Accelerated Depreciation is a Real Estate Investors’ Friend

Are you taking every tax deduction you are allowed by the IRS?  Accelerated Depreciation can be your friend.  Check out www.chattelexperts.com to learn more about how to increase the allowable deductions the IRS will permit on your investment real estate.  Things like cabinets and countertops, light fixtures, flooring and many more are depreciable over a 5 year period instead of the typical 27.5 year schedule.

Tax Strategy, an under-utilized strategy for real estate profitability

When you review the profitability of your real estate investments, do you consider all the tax advantages available to real estate investors?  Make sure to ask your CPA about segregating the value of your personal property from the value of the building so that you can accelerate the depreciation you are allowed to take.  This tax strategy can save you as much as $1500 a year.

 National Chattel Experts can provide the appraisal you need to segregate this property…check out their website at www.chattelexperts.com

Would $100 a month in extra cash flow help your real estate investments?

Most investors overlook the tax benefits of real estate investments.  While most will take advantage of straightline depreciation, few will go the extra step to segregate the ‘personal property’ from the value of the building and take advantage of the accelerated depreciation that the IRS allows.  Check out this new strategy.