John withdrew $1 million from his 401(k) account and paid the taxes due on it, which were approximately $370,000 (37% tax rate). He then used the remaining $630,000 to make a down payment on four rental properties valued at $1 million each.
John was seeking a way to offset the taxes paid on the 401(k) withdrawal and reduce his overall taxable income.
After conducting a cost segregation study on each of the four properties, we identified the following:
Total for each property:
At a 37% tax rate, John will save $69,100 in the first year.
Through cost segregation, John was able to offset the tax liability from his 401(k) withdrawal and make a substantial reduction in his taxable income. The tax savings from depreciation on the rental properties will carry over into future years, offering him a long-term strategy to minimize taxes and maximize investment returns.
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