You’d Depreciate It: Let’s Talk About Tax Rates....

“The hardest thing in the world to understand is the income tax.” - Albert Einstein

Tax rates... probably seems like the least interesting topic to read about.  But we will do our best to make our discussion as concise and as interesting as possible.

First, before we begin, let's establish that in real estate investing, tax is (almost always) our largest expense.  

So what do we do to reduce such a significant expense?  We like to approach everything with thoughtful insight, and build a strategy around the varying tax codes in different markets.

Basically, our goal is to have a deep understanding of the geographical differences and approaching tax as something unique for every single market.  

Some real estate investment firms are comfortable with only  a basic level of comfort with each submarket’s tax laws.  We believe that such groups are doing their investors a disservice and are not being prudent stewards of their investor’s capital.

CF Capital applies a different attitude and a more sophisticated approach.

So where do we begin?  Initially, we craft a process that would help us identify tax rates and assessed values.  Because we look at deals in multiple markets, we make sure we partner with and lean on best-in-class real estate attorneys who help to provide guidance in this area. We also gain clarity through the industry experts in our target submarkets.

Although we all have our (somewhat impatient) moments, we remind ourselves it is a process.  And that process does take time.

After all, property taxes can make or break a deal.

As we navigate different states, counties, and submarkets we are attentive to how each governing body has set their laws for taxation.  At every level there is a wide variety of different mechanisms for how taxes are calculated, such as how the area counts millage rates. 

In Ohio, the deals we evaluate can be very subjective, which requires us to dig into everything a bit deeper.  Whereas in Kentucky, it is really just about the millage rates, with some caveats depending on individual counties. 

After we gain an understanding of a market, we run scenarios through our models in order to maximize efficiency from the tax expense standpoint.  

We take into account the types of business expense deductions that might reduce our tax base.  Among these deductions might be the cost of insurance or cost of maintenance.

Also, we factor in the impacts of our value-add strategy.  Capex, or the large improvement/renovation expenses, can significantly alter how much we pay in taxes.  To benefit from capex, we can do things like front-load depreciation or capture tax credits.

We want to make sure that you are not getting the wrong impression here.  Yes, we want to reduce our tax expense.  But we are not trying to do everything in our power to avoid paying our fair share.  Instead we are looking to figure out what we can do to keep taxes in line with expectations so that we are contributing to the communities in which we invest.   After all, as some of you may know, our tagline is, “Elevating communities together.”  

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