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San Antonio Tax Deferral 1031 Exchanges and Cost Segregation San Antonio tax deferral through 1031 exchanges, or tax-free exchanges of real estate, have become a popular method of tax deferral of capital gains taxes. 1031 exchanges have attained almost pop-culture status with some real estate investors. It is literally possible to preform an unlimited string of 1031 tax deffered exchanges. Though a series of 20+ exchanges an investor would theoretically exchange from a house to a regional shopping mall. Of course, this would require many highly sucessful successive real estate investments. There is no limit to the number of subsequent exchanges or the value of the properties. Of course, 1031 rules must be met for each exchange. Although real estate investors were slow to understand the power of 1031 exchanges, 1031 exchanges are now widely used by many real estate investors. 1031 and Cost Segregation Almost by definition, individuals who utilize the 1031 exchange option are reluctant to pay taxes that can legally be avoided. 1031 exchangers have asked if they can receive tax deferrals and enhance depreciation. The short answer is yes. What makes evaluating cost segregation for 1031 exchanges slightly more complicated is that the cost basis is equal to the remaining cost basis of the property exchanged plus additional cash contributed in acquiring the new property. The cost basis is not simply the purchase price of the new property. Cost Basis A complete answer needs to consider the remaining cost basis for the property that has been exchanged. (Technically speaking, the cost basis is the sum of the remaining cost basis in the property which has been exchanged plus cash contributed while acquiring the replacement property.) If the remaining cost basis is minimal, it is probably not financially feasible to utilize cost segregation. Is Cost Segregation Worthwhile If the remaining cost basis (plus the amount of additional cash contributed) is at least $500,000, it is worth reviewing whether cost segregation makes sense. Investors should obtain a preliminary analysis if they are unsure whether a cost segregation analysis will generate tax savings that exceed the cost of the report. Legitimate cost segregation report preparers are able to generate an initial estimate of the likely tax savings without visiting the property. There should be no cost for preparing this preliminary analysis. Basis Allocation The total value of the new property is proportionally allocated to the remaining cost basis of the 1031 exchange property (and any additional basis from new investment). For example, if the five-year property is 10% of the value of the new property, and the remaining cost basis is $3,000,000, a value of $300,000 ($3,000,000 x 10%) would be allocated to the five-year property. Obtaining a preliminary analysis will clearly indicate whether a cost segregation report is worthwhile. Real estate investors should make obtaining a preliminary analysis for cost segregation a routine portion of their due diligence process, whether it is a 1031 exchange or a routine acquisition. Avioding Boot One interesting issue is whether five-year property in the new property is considered personal property. To gain the tax deferral benefits, a 1031 Exchange must involve like-kind property. For example, if you sell a house and purchase a lake house, boat and jet ski as your exchange property, the boat and jet ski would be considered "boot", taxable as ordinary income and the owner does not receive any tax deferral. The boat and jet ski are considered "boot" since they are personal property and the property that was sold was real estate. The definition of personal property for federal purposes and state purposes vary. For example, carpet and vinyl tile are considered personal property for federal income tax purposes. However, carpet and vinyl tile are considered real estate for state purposes in most states in the United States. The IRS defers to state tax codes in the defining personal property and real property for the purposes of a 1031 exchange. Personal Property Definition Since five-year property is referred to as personal property in IRS documentation, there has been confusion regarding this issue. The IRS defers to state law regarding whether items are real property or personal property for the purpose of determining whether there is "boot". Carpet and vinyl tile are both significant five-year life components. While they are considered personal property for depreciation purpose, they are considered real property by state law (in most states). Hence, they are not considered "boot", and the owner can experience tax deferral. Consult your tax preparer or a cost segregation expert if you have questions regarding whether a portion of the property is considered real property or personal property. Tax deferral from cost segregation is effective for 1031 exchange purchases provided the remaining cost basis is at least $500,000. Exchange buyers can defer taxes and reduce taxes on the old property and increase depreciation for the new property. Cost segregation is a powerful tax reduction technique. Real estate investors can both defer and reduce federal income taxes through the use of cost segregation. Cost segregation reduces federal income taxes by converting the nature of income from ordinary income to capital gains income. It defers payment of federal income taxes from when income is earned until the property is sold, or a gain on the sale is recognized. Click here for a FREE preliminary analysis of tax deferral and tax savings resulting from your property. Cost segregation produces tax deferrals and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions. City:
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