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Making best use of the tax law after acquiring business real estate

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Have you recently bought business real estate? Here are some basic principles and ideas that can take advantage of income tax deductions.

Separate land from tangible property. All of the cost of acquiring real estate is not depreciable. The cost of land is not depreciable. Enhancements to land are depreciable.

Plainly, when the real estate is purchased, it is considered necessary to set apart and record amounts apportioned to improvements of the land. The apportionment can be accomplished by hiring a qualified real estate appraiser or by making apportionments based on a detailed written analysis of comparable properties and information about the neighborhood where you purchased.

We would be happy to review the apportionments to see if the valuation techniques are reasonable with respect to tax law. Also, regarding the allocation, you should be aware that the cost of enhancements includes buildings, landscaping, roads, and even some fees of grading and clearing. We can assist an appraiser (or you) in identifying which of these seemingly land-related costs are, actually, costs of improvements.

Turning land into a deductible asset. Land is not depreciable however; there are methods to deduct costs that have similar tax benefit. One method is to arrange a lease of the land rather than buy it. Rents paid for a "ground lease" are deductible. Every case is different, whether a ground lease is a good method depends on the facts and circumstances.

Separating personal property from buildings. Buildings are generally depreciated over a period of 39 years, and residential rental real estate gets a more favorable treatment and is depreciated over a period of 27.5 years. Conversely, most personal property (furniture, equipment, etc.) is depreciable over much shorter periods.

Furthermore, new personal property is eligible for additional first-year depreciation (bonus depreciation) equal to 50% of its cost (if placed in service before calendar year 2014). In addition, certain leasehold improvements qualify for bonus depreciation.

As mentioned earlier, personal property that is not part of a building depreciates quicker and deductions are available sooner. Therefore, similar to apportioning between improvements and land it is key to apportion and keep a record of personal property and building parts.

Some objects of the purchase are "common sense." For example-a desk is personal property and a wall is part of a building. On the other hand, lighting fixtures, signs, floor coverings, wall coverings, plumbing, electrical systems have the peculiar characteristics that are controlled by complex rules. These complex issues lend to the need to consult appraisers and engineers.

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