By ignoring generous IRS guidelines when establishing depreciation schedules, over 90% of real estate investors are unintentionally overpaying federal income taxes. In addition they are paying federal income taxes earlier than necessary, typically years or decades earlier than necessary. Although these IRS guidelines are relatively new, they provide substantial benefits. Since this is a relatively new issue, many accountants have not integrated the new IRS depreciation guidelines into their practice. Savings for real estate investors are meaningful- exceeding $50,000 to $1,000,000 in the first year. Cost segregation converts income taxed at 35% (ordinary income) to income taxed at 15% (capital gains). Cost segregation also defers payment of income taxes, often for 5 to 10 years.

Effects of higher depreciation

Most real estate investors do not understand the benefits of increasing real estate depreciation. They often ask, “doesn’t increasing my depreciation just mean that I will be shifting taxes from now until when I sell the property?”

This is a popular misconception and the answer is a resounding “no”. There are two benefits of increasing depreciation:

1. Converting ordinary income into capital gains income

2. Deferring income until a gain on the sale of the property is realized.

The conversion of ordinary income into capital gains income has to do with the technical nature of the allocation of the gain on the sale. Many, if not most, accountants initially believe it is simply a timing issue. However, when the mechanics of recognizing gain on sale are discussed, accountants quickly realize increasing depreciation leads to paying taxes at the capital gains rate as opposed to the ordinary income rate.

Correcting a depreciation schedule makes a difference if you recently sold a property since the additional depreciation will be taxed at the capital gains rate instead of the ordinary income rate. For example, assume an investor sold a property in late 2005, does a cost segregation study, and increases depreciation by $100,000. The net result is the ordinary income taxes will be reduced by $35,000 ($100,000 x 35%) and the capital gains taxes will be increased by $15,000 ($100,000 x 15%). This nets the owner $20,000 in federal tax savings by simply correcting an error in the depreciation schedule after the property has already been sold.

When told it is possible to increase depreciation and reduce federal taxes, most real estate investors ask, “doesn’t my accountant take care of this for me?”

Our experience, after reviewing thousands of depreciation schedules for real estate, is that less than 5% of depreciation schedules have been properly established. Most real estate investors have a good relationship with their accountant and believe, as a matter of faith, that their accountant is doing everything possible to minimize their taxes. Unfortunately, many accountants have not focused time or attention on this issue for several reasons. Some accountants are aware of cost segregation as an option to increase depreciation and reduce federal taxes but believe it is very expensive (at least $10,000 per property) and is financially feasible only for large properties (typically over $10 million). Many of the providers started out either as big four firms or big four spin-offs who charged between $10,000 and $50,000 per property. Many of these providers were not interested in properties with a cost basis under $10 million and only did cost segregation for newly built properties. Other accountants have not focused on the topic.

Cost segregation clearly makes sense for properties with an improvement basis of at least $500,000. In many cases it makes sense for smaller properties. While accountants are becoming more and more active in reviewing options for depreciating real estate, in many cases the owner needs to take the lead role in proposing cost segregation as a mechanism to reduce and defer federal taxes.

Property owner involvement

Many property investors proudly take the stance that, “my federal tax return is too complicated; my accountant handles it.”

It is almost a rite of passage that a “serious” real estate investor is one whose tax return must be prepared by a third party because it has become too complicated for the investor to complete. Only about 2-5% of depreciation schedule in federal tax returns have short life property properly separated to minimize the owner’s federal taxes. While many parts of the federal tax return may be too complicated for an investor to understand and prepare, this area is simple: if you pay federal taxes and can use additional depreciation, you benefit from obtaining cost segregation studies. Most investors are not aware of cost segregation and do not understand the benefits it provides. Those who are familiar with cost segregation think it only makes sense for large properties (over $10 million). Regrettably, there is limited and inaccurate information regarding a material issue that could sharply reduce federal taxes for many real estate investors.

Proportion of short life property

The proportion of short life property typically ranges from 20% to 50% of the cost basis of the improvements. Items which typically effect whether it is at the low end of the range or the high end of the range include the age, condition, intensity of landscaping, amount of surface parking, and land value.

Catch-up

What is known in cost segregation jargon as “catch-up” is reporting depreciation that has been underreported in prior years since the property was purchased or built in the current year. A real estate investor can “catch-up” underreported depreciation by having his accountant file a form 3115 with the current tax return. The IRS has reported that filing a form 3115 is not a red flag for an audit. Some investors seem concerned this is too good to be true; however, when their accountant reviews the IRS rules and guidelines they quickly find out that you can indeed catch-up underreported depreciation by filing the form 3115.

Getting started

Ask yourself the following questions when deciding whether you can benefit from a cost segregation study:

1. Do you pay federal income taxes?

2. Do you own investment real estate?

3. Can you use additional depreciation?

Some owners are passive while others are active. If you are a passive real estate investor you may not be able to use additional depreciation. On the other hand, if you are an active investor or a real estate professional, which includes people in a wide variety of activities from real estate broker to mortgage broker to leasing agent, you are entitled to deduct additional depreciation.

If you have determined you can use additional depreciation and are paying federal taxes, call a cost segregation expert and request a preliminary analysis. There should be no fee for this initial consultation. The preliminary analysis will estimate the amount of 5, 7, and 15-year property, which can likely be identified and will also identify the catch-up depreciation. This analysis will not involve a site inspection and will not be precisely correct. However, it should be accurate enough to help you decide whether a cost segregation study is financially feasible.

Once you obtain the preliminary analysis, you should consult your accountant, since he/she will be completing and signing your tax return. In many cases, it makes sense for the accountant, the property owner, and the cost segregation advisor to meet and discuss the options and issues.

Assuming you decide a cost segregation study does make sense, you should further review whether the extra depreciation should be used in a prior year, which would involve filing amended tax returns, or whether to use it in the current year. To minimize federal income taxes, make obtaining a cost segregation study a routine part of future real estate investments.

Correctly calculating real estate depreciation is important because it substantially reduces federal taxes for real estate investors. The process of fine-tuning the depreciation schedule is called cost segregation. The adoption rate for cost segregation is under 5% because of limited knowledge by many owners and accountants. In addition, there are misconceptions regarding the cost of obtaining cost segregation studies and the smallest properties for which cost segregation studies are financially feasible. As awareness of the practice and affordable service providers increase among real estate investors and accountants, the adoption rate will increase dramatically.

This is the beginning of a new era for real estate investing and consulting. I am very excited about the future of this business and want to share my knowledge. This article will tell you a little bit about my background as a real estate investor, and will provide information about how my company, Acquired Asset Solutions, Inc., can help you to prosper.

I came to this business in late 2003 after my longtime friend Dr. J.L. Hutchinson Jr. contacted me to tell me about his success in real estate investment. He was interested in sharing his knowledge with me and in telling me all about his business, Tricomm Worldwide. I agreed to visit his office to see how Tricomm worked, and after a couple of hours of him showing me real estate deal after real estate deal, I realized I was in the wrong business.

At the time, I worked in legal investigation. I had been in the field for the past nine years. The work was very time-consuming, and I was looking for a change. When Mr. Hutchinson explained how real estate investing can provide passive income, I was very intrigued! After mulling over the pros and cons of switching careers for a while, I finally made the decision and called Mr. Hutchinson to tell him that I wanted to learn more. He initially offered me an entry-level position in the Research and Development (R & D) department finding real estate opportunities.

This was a huge step for me, since I had no background in real estate. But to my surprise, I picked this new career up fairly quickly. In my first week at Tricomm, I was trained in spotting great real estate deals. I was also taught how to find real estate bargains and creative ways to find motivated sellers and learned the basics of calculating appreciation, cap rates and returns on investments.

I did my first three real estate transactions for $1 a property, securing three single-family homes in Cleveland, Ohio from a seller tired of getting violations from the city for high grass. When I saw photos of the properties, I was surprised by their good condition and saw the potential for either flipping or holding the properties. I ended up flipping the properties fairly quickly.

In this first deal, I also dealt with a bird dog (a type of beginner investor). This meant there were two beginners on my first transaction, but with Dr. Hutchinson’s help, we were successful. After six months, I was promoted to R&D coordinator and began developing deals found by the researchers in my department. I specialized in securing seller-financed opportunities.

In 2005, I was promoted to Real Estate consultant and became partner and vice president of the firm. After directly coaching more than fifty full-time real estate investors and participating in over 3,000 transactions, I left the company in 2007 to begin a new firm. This new company, Secured REO Services (SRS) was dedicated to Property Preservation and Asset Protection for default servicing companies and banks.

After much success and some failure with SRS, I decided to return to Real Estate Investment and began consulting real estate investors full time. This started with acquiring REO’s for SRS and developed into my consultancy and intermediary company, Acquired Asset Solutions, Inc.

At its core, Acquired helps investors around the country by offering consulting for both new and seasoned real estate investors wanting to create or expand their portfolios. The most direct way we do this is through our own Research and Development department, which specializes in finding real estate opportunities that most investors cannot find on their own.Our consulting services are another vital aid to investors. We have trained and experienced Real Estate Investment Consultants, or REIC’s, that guide and support investors through each deal and offer in-person and online training to their clients.

Many investors in the consulting program are looking to become full-time real estate investors and build their real estate holdings by creating real estate investment companies. We have six and twelve-month programs dedicated to helping investors achieve their goals.
For real estate investors with larger amounts of liquid assets, we have many real estate opportunities available that are below wholesale prices. Many investors also seek our assistance in acting as a seller’s intermediary—putting them in direct contact with traders and asset managers at banks divesting of REO packages. We have developed relationships with many banks—at last count, we were working with fifty compilers!

One of the first things that I advise new investors to do is to research the business to find out about such things as: the best markets, where to get hard money, real estate lending, and the real estate networks available on the worldwide web. New investors should also research companies like ours that can assist in researching and securing properties.

For the first time in years, investors have a chance to acquire long-term holds or short-term flips and make a lot of money doing so. In 2008, we were able to acquire eight properties with $6,000. Now for the same amount of money, I can secure properties at 18-20 cents on the dollar in the Midwest. Here in California, desirable properties are available at between 60-70 cents on the dollar—an outstanding bargain! We can facilitate these transactions for those seeking bulk REO packages.

Some companies claim to facilitate bulk REO packages by promoting unrealistic numbers such as 40-50 cents on the dollar—a figure that is pure fantasy! While it is possible that in the future, these prices may be real, today these companies are just wasting people’s time chasing bulk REO tapes that do not exist.

It is possible get involved at any level in the real estate business. We are very excited about where we are headed as an investment company and the opportunities out there for all real estate investors.

For those of us fortunate enough to be in this business or even those of us buying for the first time, prosperity is a realistic goal. I wrote this article not only to tell people about our company, but to wake up those people sleeping through this historic time and to push investors that are hanging on to their cash while hoping the market will collapse further. If you are short on cash, you can still buy…maybe not a bulk REO tape, but certainly a wholesale deal. These properties will require repair, but can be fixed up with a little money, flipped or kept as a long-term hold.

Please listen to our radio show, REI Reality check, to get facts and insight regarding this business. You will learn a lot from this realistic and simplified way of buying—you do not want to miss this show! Check it out at www.acqas.com/ATMblog. Also, visit our website for consulting services or real estate deals at: www.acqas.com.

Akiba Miniefee is a San Diego based real Estate Investment Consultant. Read Akiba Miniefee Profile

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Here are some examples in the types of mortgages you may be faced with.

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pI invite you to learn more about bReal Estate Investing/b and become a member of our FREE weekly tele-seminar class where we teach tips and strategy on how to grow your breal estate investing business/b and how to raise bPrivate Money/b by going to a target=_new href=http://www.realestatewealthtoday.com/TuesdayTipsSignUp.html rel=nofollowhttp://www.realestatewealthtoday.com/TuesdayTipsSignUp.html/a./ppbMike Lautensack/b is a full-time real estate entrepreneur, coach and mentor in Philadelphia, PA and creator of the bPrivate Lending Presentation Kit/b. This powerful done-for-you kit is loaded with tools and techniques to attract and develop a consistent stream of private investors into your real estate business. To learn more about this kit and receive your FREE eBook go to a target=_new href=http://www.learnrealestateinvestingblog.com/ rel=nofollowReal Estate Investing Blog/a/pbr
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The most significant thing is that you must keep this in mind that the lender is seeking for a prospective borrower. Therefore, your credit ranking plays the most significant role here. Moreover, the lender calculates your net income and your debt burden from which he concludes whether it will be workable for you to service the debt smoothly. Also, the local laws of the area are also considered.

The concept of credit rating is very easy – the higher your credit rating, the more chances you enjoy of receiving a financing from potential lenders. A high rating is crucial as it reflects your potential to service the debt as well as your overall reliability.

If you need financing for commercial property, you should try to persuade the lenders that your business will be successful. Your financier would like to know that your business will generate sufficient funds to cover the monthly installments. Thus, include all your expenses before calculating the estimated profit.

Lender lends money on one condition that he has minimum chances of borrowers going default. Because this way he will lose his money just as well. And to reduce this risk, he will look into view the current market trends. This way, if he sees that your business might not thrive in the market, you wont get the loan.

Investing in a good location is very important as it will make all the difference i.e. the actual position of the property is a settling element which decides whether your loan faces approval or rejection. For example, you would have negligible chances of getting your loan approved for an isolated piece of real estate.

Last of all, it is crucial to bear in mind that your loan result can vary from officer to officer. Therefore, select your loan officer meticulously as a good officer would let your application process go smoothly and a difficult officer can cause you a real pain. A good idea is to see if any friend or an acquaintance knows one and has worked with a loan officer previously, and ask him for an introduction.

It is very normal that the loan officer would ask you some strange questions that might seem outright irrelevant to real estate financing application, but stay calm as he is doing it to be satisfied about every possible aspect of your financial standing prior to approving your financing facility.

You should be clearly aware that the lender is looking at every possible situation that can lead to your default in the future. You should carefully plan for the real estate investing project prior to knocking the door of a potential lender to finance.

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pI invite you to learn more about bReal Estate Investing/b and become a member of our FREE weekly tele-seminar class where we teach tips and strategy on how to grow your breal estate investing business/b and how to raise bPrivate Money/b by going to a target=_new href=http://www.realestatewealthtoday.com/TuesdayTipsSignUp.html rel=nofollowhttp://www.realestatewealthtoday.com/TuesdayTipsSignUp.html/a./ppbMike Lautensack/b is a full-time real estate entrepreneur, coach and mentor in Philadelphia, PA and creator of the bPrivate Lending Presentation Kit/b. This powerful done-for-you kit is loaded with tools and techniques to attract and develop a consistent stream of private investors into your real estate business. To learn more about this kit and receive your FREE eBook go to a target=_new href=http://www.learnrealestateinvestingblog.com/ rel=nofollowReal Estate Investing Blog/a./pbr
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Last spring, I was invited to go to Philadelphia and participate in a “real estate bubble” discussion on Ch 8’s “Money Matters Today.” Television reporters, newspapers, and media hype love scaring you to grab your attention. On the TV show, I defended the real estate market.
What’s behind all this bubble talk?
Before you give any substance to warnings about a “real estate bubble,” look closely at the source. Many stock brokers jump on the bandwagon of real estate doom to get investors back into the stock market. Also, many negative reports originate from mortgage lenders who want to keep the mortgage insurance rates high and keep the insurance premiums coming in for loans on houses that have appreciated.
So, what happened to the real estate bubble in 2005?
I can’t speak for all investors. If my family had been scared into discounting our investments, selling out, and not buying more property in 2005, we would have lost a million dollars. We bought and held houses. All of our property increased by 20% – 35% and the ones we fixed increased in value even more. In particular, for one home we paid $120,000 and spent $10,000 in repairs – within the year it appraised for $325,000.
Who profits from the real estate bubble?
Besides media scaremongers, mortgage insurance providers, and stock brokers, real estate investors make even more money. What’s that? How do real estate investors make money from the real estate bubble? They take advantage of desperate home sellers scared by the media.
This week, we bought an investment property that the home seller, in the midst of a divorce, discounted for a quick sale. The $340,000 property appraised for fifty thousand more than the purchase price. Now, we could quick sale the property for fast cash, but we’re in for the long haul. The property has great development potential. So, we’ll let the tenants pay for the mortgage and maybe tear the small house down in a few years. A half acre, one lot away from a future marina near new condos, has many possibilities.
Keep the bubble talk. People always need housing. The more you hear about the pending burst, the more money real estate investors CAN make.
Copyright ? 2006 Jeanette J. Fisher
Jeanette Fisher offers FREE “How to Start Real Estate Investing Teleseminar,” free ebook, “The Truth about Making Money Flipping Houses.” Ever wonder how those multimillionaire real estate investors got started? You might be surprised at how easy it is to buy your first investment property! Are you willing to follow four proven steps to make money investing in real estate? http://www.doghousetodollhousefordollars.com/

If you’ve got an entrepreneurial spirit, have some time and
extra cash, why not think about investing in real estate as
you’ve got the potential to earn hundreds of thousands, if not
millions of dollars a year simply by turning “flipping”
homes over.

This is particularly true these days, which is still very much
a reality in this country even amidst all the talk about the
real estate bubble.

Investing in real estate has become a booming business for
people of all backgrounds and start-up capital. Why? Because
being a real estate investor is not only easy, but it’s
rewarding to see your hard work pay off so quickly when you make
a sale with little or no money down.

Just on September 30th, there was a special segment on ABC
News, 20/20 about the latest real estate boom in America.
Real estate boom really has people flipping
for Miami and all around the country, particularly in cities
like Chicago, Boston, New York and LA. Click here to
read more on ABCNews.com

Some Important Tips In Getting The Most Out Of Your Real
Estate Investment Opportunity

If you’re low on capital money to invest in
real estate, form a partnership with friends, family or
colleagues. File a business name with the State Corporation
Commission and register with your local city to become a
legitimate tax-paying entity. Once the group of you is able to
pull funds together, put them into a bank account under your
business name. You can then approach the bank for a bank loan
for your business, increasing your chances of getting funding.

Creating a legitimate business not only can act as a liability
shelter for you, should your venture prove to be non-profitable,
but it helps to create a friendly working relationship with your
new colleagues into which everyone gets equal return on their
own financial contributions.

If you have capital to spend, invest in a tax lien. A
tax lien is, essentially, purchasing someone’s foreclosed
home, which the government retains control over until taxes are
paid. As a real estate investor, you will most likely receive a
substantial return on your money invested in a tax lien
because most homes that have been seized by delinquent tax
payers are eventually turned over to the individual or entity
that has purchased the tax lien.

To find out about tax liens in your area, contact your local
government for a list of tax lien sales and foreclosed homes.
Many states also have tax lien sale information available online
through subscription-based companies or through government
auction houses.

You don’t have to go for a killing your first year of being
a real estate investor. In fact, most people start small. Begin
by using the available money that you have to make a down
payment on a modest home in an up-and-coming area. Many people
purchase homes that are “fixer-uppers” and they get
started by doing all of the work on their own.

When the economy is booming, as it has been for the past decade,
then you can fix your home up and turn it around in a relatively
short amount of time for a moderate profit. You can avoid
paying capitol gains taxes on the cost of renovations and
improvement, so keep all receipts for work done.

If after your first purchase, you find that you are indeed
serious about investing the time and money into becoming a real
estate investor, then use the money from the sale of that first
house into purchasing another home. From the time of the sale,
you have 180 days to invest the money into a new home
before you will have to pay capitol gains taxes in what’s known
as Exchange 1031 Tax Deferred Benefits on the
money you gained from the sale.

There are many resources and lending agencies prepared to help
individuals interested in establishing a career as a real estate
investor, Furthermore, many cities incentive the revitalization
of older neighborhoods by catering to the convenience of real
estate investors. After all, everyone enjoys seeing property
bought and sold quickly within a community, for it signifies the
health of the area. Call your local government to find out if
there are specific tax advantages in place to help real estate
investors and home-based businesses alike to maximize the return
on their money.