Don't wait to deduct real estate equipment cost
Real Estate Tax Talk
By Stephen Fishman, Friday, March 11, 2011.
Did you buy any of the following for your real estate business last year:
- computer equipment,
- telephones and cell phones,
- office furniture,
- fax machines,
- map books,
- lockboxes and keys, or
- real estate books?
If so, you’re probably aware that you are entitled to deduct the cost as a business expense. Ordinarily, business property such as computers and office furniture that has a useful life over one year must be depreciated a little at a time over several years. How long depends on the type of property involved — it can vary from three to 39 years.
For example, if you purchased a $1,000 computer for your real estate business in 2010 (and used it only for business), using depreciation you’d have to deduct the cost over six years. Using the straight-line method of depreciation, you’d get the following annual deductions:
Year Depreciation deduction 2010 $100 2011 $200 2012 $200 2013 $200 2014 $200 2015 $100
What if you don’t want to wait for years to get your full deduction? You could be in luck. There is a tax law provision that may permit you to deduct the entire cost in one year — that is, deduct the entire $1,000 cost of the computer on your 2010 tax return.
If you learn only one section number in the tax code, it should be Section 179. This humble law is one of the greatest tax boons ever for small-business owners, including real estate professionals.
Section 179 doesn’t increase the total amount you can deduct, but it allows you to get your entire deduction in one year, rather than taking it a little at a time over the term of an asset’s useful life.
Under Section 179 you can deduct the cost of tangible personal long-term property that you buy for your real estate business. Examples include: computers, business equipment and office furniture. Although it’s not really tangible property, computer software can also be deducted under Section 179.
The property can be used or new, but you must have purchased it from someone unrelated to you. In addition, you must use it over half the time for business.
Section 179 is designed to help small businesses, so there is an annual limit on the deduction. In 2007, the Section 179 limit was $128,000.
In an effort to help the economy, this was increased to a whopping $250,000 for 2008. Due to the continuing bad economy, the $250,000 limit was extended through the end of 2009. The limit has been increased to $500,000 for 2010 and 2011. The limit is currently so large it presents no problems for most real estate pros.
In 2012, the Section 179 limit is scheduled to go down to a measly $25,000.
There is also a limit on the total amount of Section 179 property you can purchase each year. You must reduce your Section 179 deduction by one dollar for every dollar your annual purchases exceed the applicable limit.
For 2010 and 2011 the limit is an enormous $2 million. In 2012 and later the limit will be much lower.
There is one major restriction on using Section 179 that can limit its use by some real estate professionals: You can’t use it to deduct more in one year than your net taxable business income for the year.
In determining this amount, you subtract your business deductions from your business income. However, don’t subtract your Section 179 deduction, the deduction for 50 percent of self-employment tax, or any net operating losses you are carrying back or forward.
If you’re a married sole proprietor (or owner of a one-person LLC taxed as a sole proprietorship) and file a joint tax return, you can include your spouse’s salary and business income in your total business income.
If you have a net loss for the year, you get no Section 179 deduction for that year. If your net taxable income is less than the cost of the property you wish to deduct under Section 179, your deduction for the year is limited to the amount of your income. Any amount you cannot deduct in the current year is carried forward to the next year to be deducted then (or any other year in the future).
If your business income was too low in 2010 to take full advantage of Section 179, consider using bonus depreciation, which is not subject to an income limitation.
Bonus depreciation is a temporary law that permits you to deduct half the cost of new business property you placed in service during 2010 (for 2011, the percentage has been increased to an amazing 100 percent).
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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