Hello all, my name is Andrew Bitler. I am a small real estate investor with big problems. I recently joined a bunch of forums because there is an important issue I need to investigate. I am utterly confused about a certain tax strategy, so I hope you folks out there can help me out. Here is my situation:

I want to save on taxes and that’s why I invested in real estate. In 2006 I purchased 2 rental properties. I maxed out my deductions until I couldn’t find any other way to lower my taxable income. A lawyer told me to accelerate depreciation on my properties, but I didn’t want to have to pay him to figure out what that means. I imagine that means I can increase my depreciation deduction, but how? Anyone know what he is talking about?

You need to speak to a tax specialist - not generally an attorney. It sounds to me like you are already maximizing your depreciation value deductions.

Example: lets say the IRS allows for a max. depreciation of 10% per year of whatever the particular fixed asset is. You may have been writing off only 5% and deferring some of the depreciation value. Maximizing your deduction would mean writing the whole amount allowable by the IRS.

I don't hold myself out to be a tax specialist (can hardly spell tax) but this might give you some idea.

Steve @ www.buyingahouseandsavingmoney.com

Andrew, your lawyer was talking about a cost segregation study.

It involves identify and separating short life assets from your new property basis and depreciating them separately, thus accelerating depreciation. For example, you can depreciate a 200k property over 27.5 years, OR Using cost segregation, you determine that you have 20k in 5-year assets within the home(carpet, fridge, AC, etc...) You can depreciate the 20k in assets over the next 5 years and depreciate the 180k for the property over 27.5. From the assets alone I increase my deduction by 4k a year for the next 5 years.(the house depreciation deduction doesn't get much smaller going from 200k to180k) This allows you to get a larger depreciation deduction, so you have more money now and not over the next 27 years.

From my understanding, you've known what to do all along, you just don't know how to go about doing it. Normally I would tell you to talk to your tax man, but unfortunately they dont always know everything either and they charge you anyway. And cost segregation isn't the cheapest thing in the world. My recommendation would be to do more research, and try visiting DepreciateEm.com. That's what I tell all my clients. You can do your own form 4562 and print it out for free to give to your accountant. That way you can accelerate your depreciation while limiting your taxpreparation fees. Hope that helps.

Chris Novak

Thank you very much for telling me about DepreciateEm.com.
I had never heard of the site before, and I'm amazed more people don't know about it. The website was very helpful, and like you said, completely free. I was able to generate IRS form 4562 and it even printed out a report showing me the difference that accelerated depreciation makes. This year I have an additional deduction of over $5,000, and it really made the difference between me owing and getting a refund.:rolleyes: Thanks a lot for your help Chris. I urge anyone that is not familiar with cost segregation or accelerated depreciation :confused: to get acquainted with the website and see what it can do for you...
I hear they will also report 1031-exchanges on IRS form 8824 for free in the very near future.
Thanks a lot for referring me to the website.:D

Andrew Bitler