Financial Figures

By Michael Shelton

Executive Summary:

Tax law isn’t just about the numbers. It’s about interpretation and creative application.

Use compliance to save money

It’s amazing to me how many people throw money away because they don’t know what can be depreciated or expensed. This is especially true with rental properties. In fact, I just saved a client $58,000 on his tax return by applying some tax law advantages. Compliance doesn’t need to be a burden. It can be a great way to keep more of your money.

When I talk about compliance, I’m referring mostly to tax law, but there are lots of other business applications. Thinking of selling your business one day? Expect to be audited? Need to justify net worth? Smart bookkeeping plays a role in all of these situations.

You owe depreciation whether you take it or not

Did you know the IRS requires you to recapture depreciation when you sell a property? If you’re not applying annual depreciation on your returns, that’s your problem. The tax man doesn’t care if you forgot or didn’t know you were supposed to. They still want that money.

A client recently approached me to help with “simple tax return.” It included a rental property sale. He didn’t know he had to pay back depreciation as capital gains. He figured since he hadn’t done annual deprecation, he didn’t owe it to the IRS. He was wrong.

We reworked the numbers. His initial tax debt turned into a refund, saving him almost $3,500. As we go back to amend his returns to reflect depreciation over the past five years, it’s going to mean an extra $7,200 in his pocket. In fact, fines and late fees would have probably cost him a lot more.

Tips for tax relief with rental real estate

Most people don’t think of the many ways they can be offsetting income on rentals because they don’t understand tax law. It’s not just there to tell you what you have to pay. Tax law also provides a lot of opportunities to reduce what you owe. Of course, to keep that money in your pocket, you need to understand how it works.

Your maintenance expenses are deductible. Appliances, upgrades such as a new roof, tools, trailers, vehicles, and storage units are all expenses you can write off. You need decent records to do so. It also helps to have an advisor who knows what’s allowed.

Michael Shelton is a financial retirement counselor. Reach him at michael@discover360 Financial.com Tax law isn’t just about the numbers. It’s about interpretation and creative application. With properties seeing significant appreciation, it pays to get some help if you don’t know what’s allowed with the latest changes in the tax law.