Zero-cash flow properties (Questions)

Assume a bond-leased CVS store (seems that these are popular zero-cash flow properties):
Sold for $4M, NOI = $240K, mortgage payment = $240K, 30 year loan, lease with CVS is co-terminous with mortgage.`
So in this case, you would have no distributable cash for your investors. But using a 39 year useful life for the building, you would realize a tax savings each year.
So does that mean when you file taxes each year, the govt would cut you a check for that amount? So let's say the building in this case is valued at $2M. Over 39 years, that is approx $51K per year. So will that amount be an actual refund that goes in the owner's pocket?
In Buying Property - Asked by Eric G. - Jul 30, 2009
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Answer(s)

Mike F.
Broker/Agent
Atlanta, GA

The depreciation expense is not a refundable tax credit. Rather it is an expense that may be used to offset certain types of income which in turn could serve to reduce your total tax liability.

Jul 30, 2009
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Eric G.
Corporate Investor
Beverly Hills, CA

Mike,
I am still a bit confused. I was not implying that whatever my straight-line depreciation expense was going to simply be refunded to me.
From my understanding (and please correct me where I am wrong), to estimate a property's annual tax liability:
Property's NOI, subtract the mortgage interest payments, subtract depreciation (1/39th if commercial office/industrial/retail, or 1/27.5 if apartments).
Whatever is left, apply the appropriate tax bracket, and that is what you would owe in taxes.
This assumes, however, that your NOI - Interest - Depreciation is a positive number.
So back to my question, what if it is a negative number? I.e. you don't owe any taxes. So whatever the negative amount is, multiplied by the tax bracket.....wouldn't that be technically a refund, similar to personal income taxes? And if not, how would the owner apply that "refund/credit" so that he derived some benefit? If he owned another property that he did owe taxes on, could he sorta combine the two to cancel out the taxes owed? What if he only owned the one property and had no other assets to shelter?
Thanks much.

Jul 30, 2009
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Chris G.
Broker/Agent
Lynchburg, VA

I would consult your CPA on this, but if I understand you correctly, you are assuming that you would have a net loss for tax purposes? My understanding is that you don't get a refund on this, however you can "carry forward" this loss for a certain period of time until such time you have income with which to offset it. Depending on whether it is an "active" or "passive" loss can have different consequences, too, as I understand it. Again, a CPA can figure this out for you. I have been involved with several real estate investments that result in losses on the tax returns. This is how my CPA has handled it in the past.

Jul 30, 2009
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Davide P.
Broker/Agent
Pinole, CA

Mike, if I understand your question correctly, you're basically wondering how do you "make money/get paid" from all the depreciation taken year by year since everything cancels out. If that's the case, compare it to you being a W2 employee. You can be "canceled out" the whole year and when you prepare your taxes, expect a refund check from uncle same, same as if you overpaid while an employee and you had a large amount of write offs. However, I'd still recommend speaking to your CPA. He/she is going to paint a much clearer picture for you.

Jul 31, 2009
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Ahmed S.
Broker/Agent
Antioch, CA

Hi,
For how long you owned your property? how much you paid for it?Did you do any remodling on it, what type of property is it?Email me back I might be abel to help you and help others.
Amed

Aug 2, 2009
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Chris S.
Broker/Agent
Coeur D'alene, ID

Again you received good answers from the prior folks. I would recommend that you sit down with an experienced CCIM who has worked through a cost segregation process and/or a qualified CPA with experience in commercial real estate.
Honestly, I don't believe in looking at real estate from the perspective of depreciation since potential changes in tax laws surface every year. If the property makes sense from a value and cash flow perspective, then I consider the depreciation a plus otherwise I keep looking. In this market there are plenty of options that DO cash flow.

Aug 3, 2009
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Gregory G.
Broker/Agent
San Francisco, CA

No, it's a deduction.

Aug 14, 2009
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Srini P.
Owner/Investor
San Jose, CA

Even though this is a zero cash flow, there is a profit on this on paper as part of the mortage payment is principal.
So net deduction will be paper profit - depreciation?
Am I correct?
Also what are the advantage and disadvantages of buying zero cash v/s other with cash flow?

Aug 15, 2009
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Davide P.
Broker/Agent
Pinole, CA

Srini, yes you are correct in regards to the depreciation being your profit. In regards to non cash flow benefits vs. cash flow properties, I'd say there are nearly none. As Chris noted, the tax laws could change and you could be stuck with the new rules affecting you (i.e. when the tax laws changed 20-25 years ago). With cash flow properties, you make the "expected" income to pay your bills and only a few things change; rental rates, vacancy, maintenece, etc. All of which should be planned for in advance. With non cash flow properties you're pretty much banking on the "refund check". You might as well be in the bond market.

Aug 16, 2009
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Srini P.
Owner/Investor
San Jose, CA

Based on my limited knowledge , only benefits I see with these type of property is
1. Low down payment/financing in place (15% down). So IRR may be more than the IRR you may get for the property with same down payment (30 to 40% down).
This property may be good only if we buy with 401K money.
If we buy without 401K or something like that, then we may end up paying tax on the paper profit. This paper profit will increase over a period of time and will be more than the depreciation. So this is not exactly a zero cash flow, it will be negative cash flow after tax.

Aug 16, 2009
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