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Tax strategies to increase your real estate ROI

September 2, 2014


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 into 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. At Clark Schaefer Hackett, we’ve spent decades working with fellow members of your industry to expand their business opportunities. As a part of the team, we can offer the expertise to help you reach all of your goals and grow as an industry leader. Our experts have the savvy and knowledge to work with you through any issue you may encounter.

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 (IRS). 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. Due to 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. At Clark Schaefer Hackett, we have the subject matter experts and experience to get you the best results. We are driven and motivated to help you, and our team can prevent complications and ensure seamless operations.

Our tax services include tax restructuring, pre-development tax structuring, planning and consulting services, among many others. Our approach is comprehensive – we will work with you to constantly assess your organization and offer viable solutions. The result will be a stronger business and better cash flow. Plus, you’ll be more attractive to lenders and investors.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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