Did you know that you can group activities for real estate depreciation? Let’s expound on this…
Common Situation
- Taxpayer owns Building and Business
- Taxpayer runs business out of his/her building
- Building and business are held in separate entities
- Known as “Self Rental”
Issue with Common Situation
- Income and losses from the building can only offset income and losses generated in the building entity
- Only income in building entity is rent
- All other income is made in business entity
- Cost segregation (accelerated depreciation) is applied to building entity
- Depreciation deductions only offset rent
- Cannot offset income in business entity
Solution: Grouping of Activities: Reg §1.469
- Activity of the rental entity and the business entity are grouped
- Allows gains and losses from each to offset one another
- Allows client to take full advantage of Cost Segregation Study
- Deductions from building can offset income in business
Qualifications for Grouping
- One activity is insubstantial in relation to the other
- Grouping activities together results in an appropriate economic unit
One Activity is Insubstantial in Relation to the Other
Insubstantial is not clearly defined, but there are some guidelines:
- Rental activity is dependent on the trade or business activity
- Number of employees in the rental and trade or business activity
- Gross receipts of rental and trade or business activity –80/20
- Net income of rental and trade or business activity –80/20
- Value of assets used in rental and trade or business activity
Grouping Activities Together Results in an Appropriate Economic Unit
Five Factors –do not have to meet all of them
- Similarities and differences in types of businesses
- Extent of common control
- Extent of common ownership
- Geographical location
- Interdependencies between the activities
Generally need to Group in First Year
- Once activities are grouped or kept separate, this has to remain consistent in future tax years
- Can only change grouping if original grouping was clearly inappropriate or a material change occurred that makes original grouping clearly inappropriate
- Grouping election should be made in first year building is placed in service
How is it Applied?
- Taxpayer (other than a partnership or S corporation) must include a statement with the original income tax return that states grouped activities and an explanation as to why they can be grouped
- Partnerships & S Corps –no statement is required, must follow instructions for grouping activities on Form 1065 (Partnership Return) and Form 1120S (S Corp Return)
Are you a business owner that could benefit from our tax strategies?
Go ahead and click this link to discuss…calendly.com/woodbury-finance/tax-strategy
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