14A — August 16 - 29, 2013 — Mid Atlantic Real Estate Journal
www.marejournal.com
M ultifamily F inancing
By Timothy Torres & Ralph Anderson, The Green Group How can an individual better position themselves to obtain financing while saving tax dollars?
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btaining financing in the current economy remains a difficult
tax returns often uncovers ag- gressive stances when reporting expenses, but few understand the possible consequences lurking in the near future. People do not enjoy paying income tax, however this short sighted plan leaves many high and dry when they are speaking with lenders. Let’s pose a very basic ex- ample to illustrate how “saving” a dollar today can negatively Ralph Anderson
impact you tomorrow: A tax- payer owns a multi-family unit that provides $45,000 in rental income per year with operat- ing expenses of $20,000. Due to faulty construction the roof needs to be replaced amount- ing to $30,000. What is the taxpayer’s profit or loss? Did you answer a $5,000 loss? If so, the Internal Revenue Service disagree. In this example, the taxpayer should be reporting a profit. In general, major repairs such as a replacement roof are considered capitalized expenses and are not to be expensed entirely in the year the cash
outlay was made, rather, the cost must be depreciated over a time as specified by the IRS. Why would this matter to a lender? The lender will view this rental property as having negative cash flow in year one when it should be reporting positive cash flow. Lenders will simply refuse to lend money to a taxpayer reporting losses, especially when trying to ob- tain financing for multi-unit properties. Using the above example, the taxpayer incor- rectly expensed the cost of the roof entirely in year one. The taxpayer effectively eliminated
the chance of obtaining any financing should they wish to purchase new properties. What steps can you take to- day to save income tax dollars, help maintain your good stand- ing with the IRS, and grow your chances of obtaining new financing? First, always con- sult a tax professional before making any of these decisions. Second, capitalize expenses when necessary. Third, con- duct a cost segregation report. The cost segregation report is designed to recover the cost of capitalized expenses quicker by allocating portions of the expenses to lower useful lives. Simply put, it saves income tax dollars sooner than later. In general, residential and com- mercial properties are depre- ciated using the straight-line method over 27.5 years and 39 years, respectively. However, when these properties are pur- chased the entire cost of the building is usually lumped in the 27.5 or 39 year depreciation method. Here is an example of the power of this report and why it should always be uti- lized: A taxpayer purchases a $450,000 residential property and allocates $412,500 to the 27.5 year pool, and treats the remaining portion of $37,500 as land, which is non depreciable. Currently, the taxpayer will receive a $15,000 depreciation deduction every year for the next 27.5 years. However, after the cost segregation report the taxpayer is informed that of the $450,000 property: $225,000 is 27.5 year property, $200,000 is 15 year property, and $25,000 is land. By utilizing the cost segregation report the taxpayer has correctly shifted $12,500 and $200,000 to a 27.5 and 15 year class. The cost savings have increased from a $15,000 a year deduction to approxi- mately $21,000. In addition to the tax savings the lenders will look favorably on the correct allocations of asset lives. In conclusion, reach out to a professional CPA advisor who specializes in real estate before you contact a bank for financ- ing. It could be the difference between being approved or declined. Timothy Torres is an ac- countant at The Green Group specializing in Real Estate. Ralph Anderson, CPA is a managing partner at The Green Group. n
task, but how can an indi- vidual bet- ter position themselves t o o b t a i n f i n a n c i n g while saving tax dollars? As CPA’s
Timothy Torres
we are often engaged in the loan process after a new cli- ent is denied a loan, instead of consulting with one first. Our initial review of the new client’s
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