Tax strategies to increase your real estate ROI

Dustin Deck

Dustin Deck

by Dustin Deck, Clark Schaefer Hackett

As a member of the real estate industry, you’ve dealt with the many challenges associated with building and buying properties. You’ve dedicated time and money to the process, showing the determination, creativity and motivation needed to establish a successful organization.

During that time, you’ve also realized the many obstacles you face on a daily basis, whether it be establishing effective tax strategies, taking advantage of all available credits and incentives or planning for the future. Thankfully, real estate professionals – both developers and non-developer real estate owners – have a number of viable options available to them.

Financial awareness results in increased value

The path of a successful real estate professional is paved with smart business decisions and a sound understanding of finances.

As a developer or real estate owner, you are constantly on the lookout for that next great deal, piece of land or property that can create value. Taxes play a big role in your success as a professional, and a firm understanding of all available opportunities and incentives can help you achieve your vision. Openings to do this are available at all times, if you know where to look and how to proceed. Over the years, two specific tax strategies have become popular in the real estate industry: cost segregation and tax-deferral tools.

Consider tax-deferred exchanges prior to closing

Getting the most out of each one of your properties is a priority. For real estate owners, one of the best ways to do that is through a tax-deferred exchange. These come into play during the sale of your building, allowing you to roll the proceeds into your next investment rather than share them with the Internal Revenue Service. At its core, these exchanges allow owners to avoid paying taxes on the gain because they never actually took possession of the funds.

First and foremost, you must understand the complexity of tax-deferred exchanges. The biggest obstacle you will have to overcome is finding a suitable property where a tax-deferred exchange will work to your advantage. In some cases, the right situation will allow you to push taxes into the next fiscal year or keep rolling the income tax effect from one property to the next indefinitely. You have options – you can find a suitable property to buy or you can proceed without an exchange in place. However, once you have that check from the transaction in hand, you lose the opportunity to follow this course of action.

No matter what, make sure you contact a trusted advisor before you are at the closing table. Because of the nuances of tax-deferred exchanges, there are many ways problems can mount if you don’t take the time to closely look over every detail.

Cost segregation leads to improved cash flow

Real estate professionals can also use cost segregation as a way to defer taxes through accelerated depreciation. While it appears simple on the surface, there is actually a lot going on behind the scenes.

At its core, a cost segregation study boils down to a timing play. You’ll have the ability to shorten depreciable lives as long as it is permissible. For example, you can move depreciable lives for assets from a 39.5-year life to a shorter time frame. You can increase the value of your deductions and get the quickest depreciation possible and the best possible expense treatment. Essentially, you can get a higher return on investment on the capital if you can write if off faster.

Overall, several main benefits exist for cost segregation, including:

  • A rapid uptick in cash flow – The faster you can get a write-off, the better your return on investment will be. Due to the ability of cost segregation to shorten depreciable lives, you can defer taxes you might have currently paid.
  • A decrease in your existing tax liability – Cost segregation allows you to identify the costs of certain assets and reclassify them in a more favorable status. In many cases, this will lead to a decrease in overall tax liability by taking ordinary deductions now and paying capital gains later.
  • The ability to defer taxes – Similar to how cost segregation can affect your existing tax liability, this in-depth analysis of your assets and costs may highlight opportunities to defer taxes, allowing capital to grow unimpeded and granting you more control of your assets.
  • Reclaim past depreciation deductions – You may also have the option to reclaim missed past depreciation deductions without amending prior tax returns. In some scenarios, you may have misidentified assets, thus missing out on depreciation. Using cost segregation, you can catch these omissions.

If one of your projects has a total cost of $1 million or more, you should strongly consider cost segregation. Ideally, start this process in pre-construction. Analyze unique features of development, down to the smallest detail. These can include parking lots, reinforced floors, loading docks and many more. The end result is a rapid acceleration of the depreciation deduction and sheltered cash flow.

Outside advice can help you avoid complications

Although many real estate tax solutions can appear simple on the surface, it may get more complicated as you go along. A trusted advisor has the ability to look beyond what’s on top and dig deeper. Working with professionals, you’ll be able to ask the right questions and learn everything you need to know about maximizing your after-tax cash flow and boosting your cash-on-cash return.

When you’re looking to work with an advisor during this process, make sure you engage with the right firm.

Dustin Deck, CPA is a tax manager at Clark Schaefer Hackett working out of the firm’s Cincinnati office. He focuses on preparing and reviewing complex federal, state and local tax returns for larger corporations and partnerships within the construction and real estate industry. To learn more about Deck, visit

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