Paying Capital Gains Tax Rates is Much Better than Ordinary Tax Rates!
After salaries, income tax represents the second largest cash expenditure for most owners of commercial real estate. In fact, through extensive research of trends in accounting for depreciation and federal taxes, we identified that a majority of commercial real estate owners are misallocating cashflow by paying too much federal income tax. Current ordinary tax rates top out at about 35%. Current capital gains tax rates are generally at 15%. However, given the spending environment in Washington, most tax policy experts expect for the ordinary rate maximum to increase to 39.6% and capital gains rates to rise to 20% before the end of President Obama’s first four years. Now is the time to execute your strategy to limit cash outflows for federal income tax.
You may be familiar with the practice of segregating the building asset into shorter depreciable lives than 39 or 27.5 years to benefit from accelerated depreciation. Most owners know to apply this systematically in their portfolio on new construction and properties having been held several years. This helps to lower both federal and state annual income taxes. However, now many owners realize that whether they plan to sell a property in as little as 2 to 3 years or even after one year, there can be significant tax savings for much shorter hold times than the conventional wisdom. How is this so?
O’Connor & Associates has developed unique tools that determine the opportunity to reduce ordinary income taxes based on 1) the difference between the acquisition price and an estimated future sales price of an asset and 2) how the asset is being depreciated. In one case, a client purchased an asset for $25MM. They assumed a sales price $28MM in slightly more than 1 year given very moderate improvements. Even in that short time, after analyzing the numbers we identified they could save about $190,000 in federal income taxes, even after all capital gains would be paid. This is a direct result from the spread between ordinary and capital gains tax rates over a hold time as short as one year!
Please contact PPA today and request a free analysis of either an individual property or a portfolio of properties that you expect hold from 1 to 3 years. There could be some very solid opportunities to increase your after-tax cash returns once the property is sold by lowering your tax liability. Click here to learn more about cost segregation.
Help Your Tenants Stay Financially Strong!
PPA, in cooperation with CAPS Interactive Corp, is offering a financing alternative that can support tenants in retail or multi-tenant industrial and office properties through specific, “harder to do deals”, via often but not exclusively asset-based lending. We work through the landlord to offer a package of possible alternatives that can provide tenants with financing for space improvements, operating needs, and inventory or capital equipment purchases/leasing among others. What’s unique is that we work with the landlord of the property to create an unobtrusive brochure announcement of an “alternative financing program” for needs that are not easily addressed in today’s banking environment. We then make it available to tenants in ways that they can approach PPA/CAPS Interactive in confidence. We complete a simple analysis of their needs to determine how we might be able to help. If we transact financing, the landlord receives a referral fee.
For a landlord, making this available to a tenant can be a useful step before a concession on a renewal or when the tenant’s business is hurting and a rent reduction is requested. Many of these tenants have had historically good credit records and are in generally strong local markets or product/service sectors, but have experienced reductions or eliminations in lines of credit due to the broader national credit crisis. Ironically, in some instances they loss borrowing capacity because it was not “used enough,” as they were told.
If you would like to learn more about how to apply cost segregation to your property or portfolio, please contact Larry Brewster at PPA.