With the advent of the Internal Revenue Code of 1986, real estate owners and investors have been searching for ways to increase the tax benefits from owning or investing in real estate. A Cost Segregation Study will accelerate tax depreciation, yielding a current tax benefit. In general, the more elaborate and costly the property, the greater the tax benefit. Both commercial and residential property can reap the benefits of a Cost Segregation Study. If learning how to reduce taxes is of interest to you, this may be the most important article you have read in a long time.
FOUR FUNDAMENTAL QUESTIONS
Can you or someone you know benefit from accelerating tax depreciation on their real estate holdings? (i.e. will additional depreciation shelter current tax liabilities?)
Have you or someone you know purchased, constructed, or expanded their real estate holdings any time after 1986?
Is the cost of the building at least $1,000,000?
Do you, your company, or your client expect to retain their real estate holdings) for at least the next three or four years?
If you answered yes to these fundamental questions, then you, your company, or your client's company qualify for a unique asset reclassification strategy known as a Cost Segregation Study (CSS).
Over the last few years, we have found that many individuals and companies that owned real estate were missing out on current income tax savings by underdepreciating their real estate assets. A CSS will accelerate tax depreciation deductions, enabling individuals and companies that own real estate to lower their current income tax liability, thereby increasing current cash flow.
HOW MUCH CAN BE SAVED?
CSSs have generated millions of dollars in current federal and state income tax savings to owners of real estate. However, given the complicated nature of the study, it requires a tax expert with an intimate knowledge of the IRS code, the relevant tax cases, and a network of resources to maximize the benefits. To date, only a relatively small number of CPA firms provide this service to their real estate clients. The amount of the benefits from performing a CSS will vary depending on a). the type of property; b). the cost of the property; and c). the year it was placed in service.
While certain properties get a bigger bang for the buck than others, we have found that almost every type of real estate can benefit to some degree from a CSS. This is due to the long-lived property categories of most real estate holdings, which contain at least some amount of shorter-lived personal property. By segregating the shorter-lived personal property from the long-lived property category, we can greatly accelerate depreciation deductions. The greater the depreciation deductions today, the greater the present tax savings. The greater the present tax savings the greater the present cash flow, which in turn can be used to underwrite current or future acquisitions.
Our experience in performing cost segregation studies for the real estate industry indicates that the savings can be as high as five percent of the asset cost. On a $5 million property, for example, a five percent benefit would generate $250,000 in tax savings. Savings of anywhere from $50,000 to $1 million, or more (depending on the type and size of facility) are routine.
WHAT TYPE OF PROPERTY BENEFITS THE MOST?
While almost every type of real estate can benefit from a CSS, our experience indicates that certain types of property yield the highest tax saving benefits from a CSS. Those properties include specialty-use buildings, such as medical facilities, manufacturing facilities, and high-end office buildings, to name a few. Warehouses and industrial properties tend to yield lower benefits, while residential garden apartments fall somewhere in the middle. We have found that even large tenant fit-outs can qualify for substantial benefits …