Terms You Need to Know for Real Estate Tax Strategies | USTaxAid

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Terms You Need to Know for Real Estate Tax Strategies

Written by Diane Kennedy, CPA on July 17, 2021

Sometimes I get stuck on a question during Wednesday’s coaching class. I wanted to follow up in an email because I couldn’t think of the answer at the time. 

Let’s start off with a question that was related to last Wednesday’s topic, which had to do with depreciation strategies for real estate investors. How to stop, start, speed up, catch up and slow down depreciation safely and legally.

And, most important, WHEN to put those kinds of strategies in place. 

I received a question that came into my Coaching@USTaxAid.com mail box after I’d already started the class and so didn’t see it until later.

I am SO GLAD for the question, because I had just committed one of the fatal sins of CPAs. 

I had just started talking CPA jargon. 

For lawyers, we call it legalese.

I guess for CPAs, we call it CPAese.

During the session and in the Home Study Course, “Seven Proven Strategies for Depreciation”, I had used terms that the coaching member asked me about.

Here the terms with a quick definition:

“Capitalizing it and then depreciating over time” 

Sometimes you may have an expense for your business or real estate that is actually an asset. For example, let’s say you buy a computer for your business. It is an asset, not a direct tax deduction (expense). Or you may buy a new HVAC system for your real estate. It’s is an asset, not a direct tax deduction.

Contrast that with buying a case of paper for your business. That’s an expense, not an asset. Or let’s say you pay the power bill for your real estate rental. That’s an expense, not an asset.

If you purchase a business asset, in most cases you are able to capitalize it and take a depreciation deduction for it. That’s what it means to capitalize and then depreciate an item. 

“If by taking an expense all you do is create a loss you are just  increasing suspended losses”

One of the challenges with passive real estate is that you may not be able to take the loss against your other income. If you can’t take the loss, it is suspended and rolls forward to future years. 

“Recapture” 

Depreciation that you take on your property is accumulated over time. When you sell your property at a gain, a portion of that gain will be considered recaptured depreciation. It is taxed at a higher rate of tax than the capital gains is. 

“Suspended loss”

Loss that you can’t take in the current year is “suspended” to roll forward to be used in the future. 

“Suspended losses reduce the amount of gain you will receive capital gains treatment on and increasing the recapture tax”

Let’s use an example to explain that. Let’s say you have gain of $50,000 and $20,000 of accumulated depreciation. That would calculate as $20,000 of depreciation to be recaptured and the rest ($30,000) is taxed as capital gains tax. Depreciation recapture is taxed at a higher rate.

Now let’s say you have more accumulated depreciation. Gain of $50,000 and $30,000 of accumulated depreciation. That would calculate as $30,000 of depreciation to be recaptured and the rest ($20,000) is taxed as capital gains. 

If you ever get stuck on terms in a tax strategy that you read or hear about, ask. CPAs have their own terms about things like this.

What you don’t know, can cost you big time… in taxes.

The Wednesday coaching teaches strategies that help our clients save thousands of dollars in taxes. And more than that, teaches the language behind the strategies. If you don’t know, ask! 

https://www.ustaxaid.com/coaching-program/

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