5 sneaky tax deductions

You've probably never heard of these write-offs, but they could save you a lot of money and make your April easier. Why send the IRS any more than you need to?

By Jeff Schnepper, MSN Money

1. 'Depreciate' land

Depreciation is the deduction you take to expense and recover the cost of a business or investment asset. If that asset has a useful life of more than one year, normally the IRS requires you to write off the cost over that period. Depreciation, in theory, is the way you get to deduct your cost over the life of the asset.

The key words here are "life of the asset." Because land has an unlimited life, you don't qualify for expensing or depreciation. But that doesn't mean you can't suck some tax savings out of the land if you get creative.

Assume you have a piece of residential rental real estate. You know you can depreciate the cost of the building over 27.5 years. But how about the land? Here's what you do:

1. Set up an irrevocable trust with an independent trustee and your kids as beneficiaries.

2. Draft a deed that separates the land from the building. Gift the land only to the trust. You and your spouse each have an annual gift tax exclusion of $13,000 per child, plus a lifetime gift tax exclusion of $5 million each. That means no tax unless the value of the land is in excess of $10 million. In that case, call me -- you can afford my fees.

3. You now own a rental building on property owned by the trust. Legally, the trustee has a fiduciary obligation to offer you a choice: Either get the building off the land or pay a lease rental fee.

Assuming you have an IQ of at least two digits, you're going to pay some rent. But what are you really doing? You're now taking a deduction for the lease rental at your higher bracket while the income is taxed to your kids at their lower rates. You pocket the difference. If we're talking a rental of $1,000 a month and you're in the 28% bracket and the kids are in the 10% bracket, that's an annual family savings of $2,160. Be sure to watch out for the "kiddie" tax.

The same concept works with any land used for business or investment, such as farmland. If you don't have kids, how about parents in a lower tax bracket whom you want to help support?

That's how you "depreciate" land!