seemingly little-known tax-planning strategy can enable real estate investors to not only realize cashflow more quickly but also simultaneously reduce tax liability. Commercial or residential properties often depreciate over 39 years or 27.5 years, while personal property or land improvements typically depreciate over 5 to 15 years. The tax strategy reclassifies parts of a building to personal property or land improvements, thereby allowing them to depreciate within a shorter time period than the building as a whole. As Coons mentioned, however, cost segregation is not for every type of investor. Cost segregation studies can be quite expensive, and investors may not reap the cost in tax savings via depreciation or even through the property’s sale. Consult with an attorney or CPA to see if cost segregation is a good idea for you.
For example, if you’re a fix-and-flip investor buying and selling properties in your home state, Coons recommends this scenario: You, the investor, have set up a C-Corporation in the state in which you reside, and you plan to buy and sell property through that entity. To have more asset protection for your growing brand, flippers should consider setting up Limited Liability Companies that are owned 100 percent by the C-Corp. Then, rather than purchasing properties through the C-Corp, use one of your LLCs to purchase and sell the property. After the property sells, dissolve the LLC to limit the potential harm to your broader organization. A C-Corp can establish and dissolve as many LLCs as it’d like, thereby allowing an investor to protect assets throughout their organization, he added. “The reason is I don't want to be in the middle of a flip three years from now and somebody comes back and sues me for something that occurred three years earlier because it could seriously disrupt my business,” Coons said. “By dissolving the limited liability company, you're making it go away because people would say ‘Well, he's out of business. That LLC is no longer working.’”
3. SETUPTHE RIGHT BUSINESS STRUCTURE
Once again, every investor’s situation is different. But regardless of your real estate investing goals or strategy, Coons said it’s important to have the right structure for your business.
You can learn more about Coons’ recommendations and strategies on the Anderson Business Advisors YouTube channel.
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