Tax Consequences of Investing in Real Estate

Real Estate Agent with Fore Properties

As part of my series, "How to Safely Invest in Real Estate", I wrote about the importance of surrounding yourself with great people who were leaders in their respective fields. One of the most important people to have in your Mastermind Group, MMG, is a competent real estate accountant.

I asked Monica McDonald of Busby & Co. in Southern Pines, NC, write about some tax issues.

Monica earned her Bachelors Degree in Accounting from The University of North Carolina at Pembroke in 1988, where she double majored in Business Management. She has been in the accounting industry and employed by Busby and Co., CPAs since 1988. She earned her certificate and has practiced as a CPA since 1994. She resides in Aberdeen, North Carolina with her husband and two children.

Tax Tips When Owning Rental Real Estate

 Depreciation is one of the major deductions when owning rental real estate. The cost of the real property can be depreciated over a period of 27.5 years as long as 80% or more of the gross rental income is from dwelling units. So, essentially any building that is residential rental property falls under this category.

It is important to consider the cost of various elements of the building, known as cost segregation. Some of these elements can be treated as personal property and can be depreciated at an accelerated rate for a shorter period of time. How do you determine what is personal property? Is the item a structural component (real property)? Of course the answer to all tax questions depends! The owner must look at the specific facts related to each element in question. Is the item related to the operation and maintenance of the building? If so, then it is probably a structural component. Following is a list of some items that have been determined to be structural components and therefore part of the real property: bathtubs, boilers, ceilings, central air and heating(including HVAC unit), chimneys, doors, electrical and wiring, fire escapes, floors, hot water heaters, light fixtures, paneling, partitions(unless removable), plumbing, roofs, sinks, sprinkler systems, stairs, tiling, walls and windows.

Remember, that appliances and, in most cases, emergency generators are not structural components and may qualify as section 179 property. If they do qualify, they could possibly be written off in the year of purchase.

One last note related to the segregation of property. If the building is sold or transferred in a like-kind exchange, gain will be triggered to the extent that these items were segregated and depreciated at a faster rate. For more information about depreciation, you can go to

I will be bringing in more experts from my MMG in future blogs. If you want to hear about something specific, please let me know.


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