Thank you, U.S. Tax Code!
January 21, 2020
By Henish Pulickal, CEO at CalHomeCo and James Harnsberger, Enrolled Agent at SMIB Management, Inc.
Thank you, U.S. Tax Code? Those are words that are rarely said, thought or believed! But a proper tax strategy can literally help you build and pay for an ADU, one of the best, and safest decisions you can make for your personal financial health!
If you thought building an ADU was a good opportunity, you are wrong – it’s an incredible opportunity! Without the proper tax strategies, an ADU will still generate as much as a 12% cap rate. That rate is about 3 times higher than the typical San Diego cap rate for investment properties of 4%. So even if you stop reading now, building an ADU can be a very good financial decision.
With the proper tax structure, your property can generate a 12% cap rate and a net cash flow of 36%! How is that possible?!
Step 1: Write off the share of all property operating and maintenance expenses associated with the ADU. On an ADU that you lease to renters, this can save over 60% of your net rental income. Lower income means lower taxes.
Step 2: Depreciate the cost of the structure, the furniture, fixtures and the improvements on the land. That can offset your rental income by as much as 80%!
With just those 2 steps, you can offset your rental income by as much as 140%! To the IRS, that means you are losing money. In some cases, you may Use that loss to offset other income, and now you are paying less taxes, and keeping the cash from the rental income.
Does the math sound too good to be true?! Don’t believe this article, talk to us to verify the facts. There’s no tricky strategies or techniques being employed. We’re following the same IRS code that everyone else must follow.
There’s only one question that remains: can you afford to wait and think about it?
*Disclaimer: numbers and assumptions on this article are used for illustration purposes. Your actual numbers will vary. Consult with your tax advisor before making any decisions, or we can refer you to an expert.
Henish Pulickal, Broker CalDRE 01866631
Blake Hedrick, Contractor CSLB 1044138
4250 Morena Blvd Suite E
San Diego, CA 92117
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