Maximizing Cash Flow and Tax Savings in Real Estate Construction

Maximizing Cash Flow and Tax Savings in Real Estate Construction


Problem

A medical doctor constructed a $2.5 million private clinic on land that he had acquired several years earlier. His original accountant depreciated the entire property over a 39 year life. This 39 year depreciation life created an increase in taxable income and did not maximize cash flow for expenses that could have been better utilized in the startup years.

Approach

At Hart Vida & Partners, it’s about maximizing cash flow.

We know the IRS tax code, and are experienced in finding flexibility within the IRS tax code. One of the key components in the FlowFirstTM management model is the use of the IRS tax code to strategically avoid or defer taxes, in order to ultimately maximize cash flow.

Solution

By utilizing engineers, and performing a cost segregation study, Hart Vida Raffo was able to ascertain that the newly constructed clinic, which typically depreciates over 39 years, is eligible for accelerated depreciation. The depreciation of real estate value can be written off as a tax deduction. Accelerated depreciation permits larger portions of the depreciated value to be claimed early in the depreciation cycle, resulting in larger deductions over a shorter depreciation period.

Accelerated depreciation also helps to reduce costs during a company’s startup years. By increasing deductions during the first few years of business, owners can reduce a company’s overall tax debt and have greater cash flow to channel directly toward building the business. Greater cash availability for marketing and expansion during the company’s startup years will increase its chances of being successful in its target market.

Outcome

Using the data from the cost segregation study and engineering reports, Hart Vida Raffo was able to shorten the life of certain assets for the client, and accelerate his depreciation expense. Hart Vida Raffo filed the appropriate tax forms, and began writing off the clinic ahead of schedule. As a result, cash savings in excess of $215,000 were realized by the client over the first five years.

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