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Houston Real Estate Investors Benefit from Cost Segregation
Houston retail real estate investors face many risks. The perpetual state of change for the retail industry generates uncertainty for retail real estate investors. As the retail business changes, retailers seek real estate to best execute their evolving business plan. Risks include functional obsolescence, cash flow, liquidity, credit risks and market risks. For example, retail real estate investors have seen many changes. Even within the last ten years, retailers have seen marked changes in the size of grocery stores, grocery competitors (with Wal-Mart entering the business) and the uncertain fate of many "mid-tier" grocery firms. Retailers entering bankruptcy or "going dark" are a perennial risk. While many markets have limited market risk, some of the sunbelt market experience periodic overbuilding. Strip centers seem to have the lowest level of risk. The need for pizza parlors, nail salons, convenience stores and liquor stores continues unabated. However, shadow anchor retail strip centers adjacent to a big box retailer can suffer if the big box retailer goes dark. Real estate investors also experience numerous operating expense increases and challenges getting tenants to pay CAM. Retail tenants frequently claim difficulty in paying rent due to difficult business circumstances. In addition, retail tenants sometimes express shock as a result of a large property tax increases or large increases in other categories of operating expenses. Property tax appeals are an annual process in states with high property taxes and aggressive tax assessors, such as Texas. Property taxes are a substantial expense in many states. They can total 3% of the actual market value of the real estate. Tenants are particularly sensitive to large and unexpected increases in real estate taxes. Income taxes are one area where real estate investors can achieve substantial benefits for a modest expense. Retail real estate investors face many challenges; focusing on reducing federal income taxes is sometimes neglected due to the press of everyday operating issues. However, a modest investment of time to review tax reduction opportunities can reap rich rewards. Cost segregation provides tax benefits by increasing depreciation. It increases depreciation by considering up to 130 line-items for the depreciation schedule. (Cost segregation is not the same as a practice known as component depreciation. However, the net effect of both is the same reduced income taxes through higher depreciation). Cost segregation is an IRS-guided technique to accurately allocate the cost basis of real estate. It often involves allocating the value between 50 and 60 long-life and short-life items. Obtaining a cost segregation report provides real estate investors a safe harbor since the IRS provides detailed requirements for preparing a cost segregation report. Higher levels of depreciation provide two tax benefits to real estate investors:
Click here for a FREE preliminary analysis of tax savings resulting from your property. Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions. City:
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