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Cost Segregation Study
 

Cost Segregation Study

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What is a cost segregation study and how is it done?

What is a cost segregation study and how is it done?

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    Cost Segregation Study Cost Segregation Study Presentation Transcript

    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Understanding The Latest IRS Updates Relative to Cost Segregation Studies Release Powerful, Underutilized Tax-Saving Strategies for Commercial and Investment Real properties This document and/or electronic file contains information that (a) is or may be LEGALLY PRIVILEGED, CONFIDENTIAL, PROPRIETARY IN NATURE, OR OTHERWISE PROTECTED BY LAW FROM DISCLOSURE, and (b) is intended only for the use of Best Bottom Lines, LLC. You must have written authorization from Best Bottom Lines, LLC to use, copy or distribute any part of this document as it’s strictly prohibited.
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Goal of Cost Segregation Studies Would you Rather Get Your Money Back Today or in 39 Years? Would you Rather Get Your Money Back Today or in 39 Years? Goal = to identify all construction-related costs that can be depreciated over 5, 7 and 15 years and reclassified from 39, 31.5 and 27.5 years Traditional depreciation for Real Property is 39 years for commercial property and 27.5 years for residential rental property Personal property is depreciated much quicker and can be depreciated over 5, 7, 10, and 15 years Reducing tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow “You must pay taxes. But stop leaving a tip.”
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Major Benefits to The Property Owners? Generates Cash Flow and Minimizes Taxes Look back study for catch-up of depreciation could generate refund Free up money for investments which allows for compounded growth Benefit to clients includes ability to expense versus capitalization of real property when conducting demolition or when remodeling is involved. Reduces real estate property taxes Increase Cash Flow for Maximum Bank Financing Section 179 Benefits Reduced Insurance premiums
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC So What Is The Big Deal? The depreciation for a property with a Cost Segregation Study allows for significant increase in deductions within the first five years. For every $100,000 of cost shifting from 39-year property to 5-year property, the net present value of the tax benefit is approximately $16,000* For $100,000 of cost shifted from 39-year property to 15-year property, the net present value of the tax benefit is approximately$10,600* * Benefits assume a tax rate of 35% and a 5% return on investment
    • Timing Illustration Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC CSS Brief History CS has been around since the 1960’s – it was called Component Depreciation There have been over 200 court cases and IRS rulings supporting the benefits of CS Initial cases were related to Investment Tax Credit (ITC) and whether items related to a structure could qualify for a credit. Congress enacted ACRS 1981 with new shorter lives 40 year life reduced to 15, 18 & 19 years Simultaneously disallowed component depreciation MACRS enacted in 1986 reiterated disallowance of component depreciation
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Hospital Corporation of America Landmark Decision - 109 TC 21(1997) Court reinstated and expanded a form of component depreciation Certain costs related to specific ordinary use equipment (building support systems that would otherwise be viewed as structural) qualify to be depreciated over life of underlying asset. IRS acquiesced to Tax Court Ruling - 1999
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC CSS Brief History In 1999, the IRS released Legal Memorandum 19921045 in which the IRS agreed not to contest the (HCA) reclassification of building costs into different asset categories that result in shorter depreciation lives – This legal memorandum directs agents to verify that an engineering or architectural study has been done to identify portions of the building's system not related to the operation and maintenance of the building – Without these detailed studies, IRS agents are advised NOT to accept the reclassifications – is a “facts and circumstances” assessment – Use of Cost Segregation Study (CSS) must be specifically applied by the taxpayer – Allocations based on “logical and objective” measures – Not based on non-contemporaneous data, or assumptions without supporting records – CSS must be “closely scrutinized” by the field
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC IRS - Audit Technique Guide Issued in April 2004 Developed to assist Field Examiners “WHY” are cost segregation studies performed? “HOW” are they prepared? “WHAT” to review and look for? IRS Cost Segregation Audit Techniques Guide – Assist Field Examiners “Why” are CSS performed? – “How” they are prepared? – “What” to review and look for? –
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC What is being said about Cost Segregation? “Property Owners Profit from Change in Tax Law” “Cost Segregation Studies fast growing tax strategy” “Investors find a friend in the IRS” “It is not unusual for engineering consultants to classify 20 to 40 percent of construction as Audit Technique Guide personal property”
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualifying Property Any building placed in service since January 1st, 1987 Existing buildings undergoing renovation, remodeling, restoration, or expansion Major leasehold improvements to any building made after January 1st, 1987 Inheritance of commercial and investment real properties Preconstruction planning to recommend possible modification to the building designs to increase shorter-life asset classification
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Cost Segregation for an Existing Building “Catch Up” – Look Back If a cost segregation study is conducted on an existing building, – The unclaimed depreciation on personal property components that were previously classified as real property can be deducted as a Code Sec. 481 (a) adjustment in the year of change – The automatic change of accounting rules of Rev. Proc. 2002-9, apply If a cost segregation study is performed on a building that was placed in service in a tax year that ended before December 30, 2003, – The IRS will allow a tax payer to file amended returns to claim the benefits – Interest is payable by the IRS on the refund
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Cost Segregation Studies Includes New and Previously Acquired Properties The optimal time to perform a study is the year the property is placed in service Current IRS procedures allow a taxpayer to recover any missed depreciation on properties placed in service as far back as 1987 without having to amend prior years tax returns Cost Segregation is not limited to new construction. In fact, most studies are performed on acquired properties where land and building is purchased for one negotiated price in a previous year MACRS - GDS 39 - Year Property 27.5 – Year Property 15 - Year Property OR 7 - Year Property NEW CONSTRUCTION ACQUIRED PROPERTY Indirect Costs 5 - Year Property + Purchase Price 3 – Year Property General Contractor Costs Land Cost + Direct Costs outside Building and Site General Contract Implementation Cost
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Benefit of Cost Segregation – Cash Flow – Would You Take the Cash Savings Today? CSS Illustration No. 1 CSS Illustration No. 1 A taxpayer purchases (or constructs) a strip mall for $4 million (land excluded) Without a Cost Segregation Study, the taxpayer would have depreciated $4,000,000 as a 39-year asset over 40 years (straight-line, HY convention)
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Benefit of Cost Segregation – Cash Flow – Would You Take the Cash Savings Today? CSS Illustration No. 1- (continued) CSS Illustration No. 1- (continued) Asset Original Original Allocation Allocation Class Asset Life Allocation Allocation After CSS After CSS Personal Property 5 yr. 200% db $ - 0.0% $ 1,000,000 25.0% Personal Property 7 yr. 200% db $ - 0.0% $ - 0.0% Land Improvements 15 yr. 150% db $ - 0.0% $ 400,000 10.0% Real Property in yrs. 39 $ 4,000,000 100.0% $ 2,600,000 65.0% Real & Personal Property $ 4,000,000 100.0% $ 4,000,000 100.0% Total Cost $ 4,000,000 100.0% $ 4,000,000 100.0% By segregating assets and applying proper class lives, significant portion of the building can be depreciated faster Typically, about 35% of total cost can be reclassified from real property to personal property for this type of building
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Benefit of Cost Segregation – Cash Flow – Would You Take the Cash Savings Today? Cost Segregation Estimate Benefit Calculation Tax Savings NPV of CSS Illustration Continued Depreciation Depreciation from Change in Deferred CSS Illustration Continued Expense Expense With Change in Cumulative Depreciation Taxes (35% Tax Rate) (5% Disc. Rate) Year Without CSS CSS Depreciation NPV Asset Year 1 2006 $ 98,291 $ 283,889 $ 185,598 $ 64,959 $ 64,959 $ 64,959 2 2007 $ 102,564 $ 424,667 $ 322,103 $ 112,736 $ 107,368 $ 172,327 3 2008 $ 102,564 $ 292,867 $ 190,303 $ 66,606 $ 60,414 $ 232,740 4 2009 $ 102,564 $ 212,647 $ 110,083 $ 38,529 $ 33,283 $ 266,023 5 2010 $ 102,564 $ 209,569 $ 107,005 $ 37,452 $ 30,812 $ 296,835 5-year Total 2010 $ 508,547 $ 1,423,638 $ 915,091 $ 320,282 $ 296,835 6 2011 $ 102,564 $ 149,198 $ 46,634 $ 16,322 $ 12,789 $ 309,623 7 2012 $ 102,564 $ 90,286 $ (12,278) $ (4,297) $ (3,207) $ 306,417 8 2013 $ 102,564 $ 90,286 $ (12,278) $ (4,297) $ (3,054) $ 303,363 9 2014 $ 102,564 $ 90,286 $ (12,278) $ (4,297) $ (2,909) $ 300,454 10 2015 $ 102,564 $ 90,286 $ (12,278) $ (4,297) $ (2,770) $ 297,684 10-year Total 2015 $ 1,021,368 $ 1,933,981 $ 912,614 $ 319,415 $ 297,684 40 2045 $ 4,274 $ 2,778 $ (1,496) $ (524) $ (78) $ 200,039 Over 40 Years $ 4,000,000 $ 4,000,000 $ - $ - $ 200,039 Cash savings of $320,282 can be achieved over the fist 5 years w/ CSS Although cash savings / tax savings over the tax life of the building does not exist, net present value of the earlier tax savings or deferred taxes due to accelerated depreciation results in net present value of $200,000!
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Again, What is the Big Deal? FASTER CASH FLOW! The depreciation for a property with a Cost Segregation Study allows for significant increase in deductions within the first five years. For every $100,000 of cost shifting from 39-year property to 5-year property, the net present value of the tax benefit is approximately $16,000* (NPV = $16.00 per $100 invested) For $100,000 of cost shifted from 39-year property to 15-year property, the net present value of the tax benefit is approximately$10,600* (NPV = $10.60 per $100 invested) * Benefits assume a tax rate of 35% and a 5% return on investment
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Why are the CPA and Engineer Important in the CSS Process? First element of a quality Cost Segregation Study according to the IRS Audit Techniques Guide is: Provider who marries the science of engineering with the principles of tax and accounting to arrive at financial solutions that results in increased cash flow, minimized tax payments and increased ROI. A firm that meticulously follow the IRS guidelines and go beyond the standards and basic requirements outlined by the IRS “Prepared by an individual with expertise and experience.” Select CPAs and engineers familiar with engineering, construction, architectural and estimating processes and techniques are essential for a quality CSS process. Select CPAs and engineers with appropriate tax background and knowledge of over 200 court cases, many revenue ruling and revenue procedures dealing with cost segregation area are essential for a quality CSS. Additional Considerations I think Audit should be first I would also add preconstruction Must understand abandonment issues Knowledgeable on issues involved with §1031 & §1033 exchanges and how they interact with Cost Segregation Must have expertise in Form 3115 Change in Accounting Method filing procedures Understanding how Cost Segregation can affect estate taxes, passive loss situations, IRS §179 deductions, Net Operating Loss situations, §168(k), partnership §754 step-up elections and other tax situations Experience in lease review and identification of “qualified leasehold property” Does the CSS include time for audit support
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Tax Planning & Other Benefits Insurance Premiums • Demolition Loss – expense vs capitalize Recapture • Estate Planning Closing Costs (doc stamps) • Strategies Property Tax Benefits (RE vs. Tangible PP) 1031 Exchange • Strategies Preconstruction recommendations • Real Estate Professional Lessor • Passive Taxpayer & Lessee • Multiple Entities
    • 1031 Exchanges Planning With CSS Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Why do I need an Engineering Expertise for a CSS? 3 Words: Mechanical, Electrical, Plumbing 3 Words: Mechanical, Electrical, Plumbing Cost segregation study (CSS) is an IRS-sanction technique allowing businesses to accelerate depreciation on their facilities Although the IRS does not prescribe one specific methodology, the IRS’ Cost Segregation Audit Technique Guide does not enumerate several and elevates the Detailed Engineering Approach From Actual Cost Records as “the most methodical and accurate approach” – This approach consists of carefully examining all contemporaneous construction and accounting records – Estimates or “take-offs” are used to supplement the actual cost detail when the existing detail is not sufficient for the purposes of the study – A professional firm comprised of accountants, engineers, and architects with prior cost segregation experience, is required to perform this kind of cost segregation study Methodology without the engineering expertise will not withstand IRS scrutiny in accordance with the IRS Audit Technique Guidelines Without the contractor/engineering expertise coupled with the tax law guidance, there will likely be valuable tax benefits left on the table Determining 1245 property value on existing properties must be properly documented and appraised and indicated according to the IRS Audit Technique Guidelines
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Detailed Engineering Approach Identify the specific project/assets that will be analyzed Obtain a complete listing of all project costs and substantiate the total project costs Inspect the facility to determine the nature of the project and its intended use Photograph specific property items for reference. Review “as-built” prints, specifications, contracts, bid documents, contractor invoices and other construction documentation. Identify and assign specific project items to property classes Prepare quantitative take-offs for all materials and payment records to compute actual unit costs “It is the most methodical and accurate approach.” Audit Technique Guide
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualifying Property Property Types Property Types Airports Gas stations Research facilities Golf resorts Apartment buildings Retail centers Grocery stores Hospitals Resorts Assisted Living Facilities Hotels Restaurants Automobile dealerships Industrial facilities Service stations Automotive service centers Laboratories Shopping centers Banks Manufacturing facilities Sports facilities Casinos Marinas Storage facilities Cinemas Medical facilities Warehouses Day care centers Mixed-use facilities Department stores Nursing homes Distribution centers Office buildings Fitness centers Funeral homes
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Which Properties Benefit Most? Property Type Percentage Reallocated Reso rts 38% Restaurants 34% Residential Rentals Personal Property 34% Leaseho ld Impro vements 33% Real Property Ho tels 33% Nursing Ho mes/A ssisted Living 32% Labo rato ry/Research 31% B anks 31% M edical/Surgical 29% Wareho uses 27% Ho spitals 27% Day Care Centers 27% A uto Dealerships 26% Fitness Centers 25% Department Sto res 25% Office B uildings 25% P o st Office 24% M arinas 24% A uto Service Centers 23% Sho pping Centers 21% Industrial 19% Distributio n Centers 18% A irpo rt Hangers 18% M anufacturing & P ro cessing 18%
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Cost Segregation Recent Results Project: Apartment Complex – 12 Complexes Cost: $18,100,000 5 Year Tax Savings: $1,585,222 Project: High-End Office Building Cost: $5,234,125 5 Year Tax Savings: $625,678 Project: Hotel Cost: $7,123,456 5 Year Tax Savings: $812,145
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Look Back Example CSS Look back Example CSS Look back Example A taxpayer purchased (or constructed) a strip mall for $4 • million (land excluded) in 2000 Without a Cost Segregation Study, the taxpayer has • been depreciating $4,000,000 as a 39-year asset over 40 years (straight-line, HY convention)
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Look Back Example – continued CSS Look Back Example Cost Segregation Estimate Benefit Calculation CSS Look Back Example Depreciation Depreciation Expense Expense With Change in Overpaid Taxes (continued) (continued) (35% Tax Rate) Year Without CSS CSS Depreciation Asset Year 1 2000 $ 98,291 $ 283,889 $ 185,598 $ 64,959 2 2001 $ 102,564 $ 424,667 $ 322,103 $ 112,736 3 2002 $ 102,564 $ 292,867 $ 190,303 $ 66,606 4 2003 $ 102,564 $ 212,647 $ 110,083 $ 38,529 5 2004 $ 102,564 $ 209,569 $ 107,005 $ 37,452 6 2005 $ 102,564 $ 149,198 $ 46,634 $ 16,322 6-year Total $ 611,111 $ 1,572,836 $ 961,725 $ 336,604 IRS Owes The Property Owner $336,604! What could you do with the new found money of $336,604 that was • trapped in the walls of your investment? Make additional investment Reduce mortgage debt Address maintenance items
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Examples of Pre-Construction Benefits Pre-Construction Planning: In the design phase, CORE can help make the building more tax efficient by identifying business components from the structural components Example: Law Firm uses hinges for $1MM decorative lobby shelving versus attaching shelving with a permanent adhesive Total property is able to be moved from – 39-year depreciation to 5-year depreciation for a tremendous savings Example: Hospital installs $1.8MM floating floor system versus permanent attached flooring Structurally as sound, cash savings from – more attractive depreciation schedule substantial
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Insurance Savings Alone May Pay for Cost Segregation Study There are a number of benefits to your insurance program after completing a Cost Segregation study: – Lower premiums. By providing the insurance underwriter with a Cost Segregation study, they can better understand your risk, their company’s exposure and accurately rate your insurance There is no more guess work on the underwriters behalf and that guess work usually works in their favor in the way of higher premiums to you – In the wake of the recent natural disasters affecting the insurance market, most insurance policies are changing from blanket policies to stated value Each location will carry a stated value on the policy and in the event of a claim that is the maximum you can collect A Cost Segregation study will provide you with the piece of mind that you are insured to full value Cost segregation studies allow property owners to accurately insure their business property, leading to a more cost effective use of your insurance dollar
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Additional Benefits from CSS Demolition/Rehabilitation Ability to identify components of a building prior to demolition and/or rehabilitation which can be reclassified as personal property versus real property Allows the owner to write off these items versus capitalizing the assets which generate a substantial tax savings For example, if a property owner has a $5- million property that they are going to demolish: – The total cost would typically get applied to the land with the property owner having no ability to depreciate or recoup the $5-million investment – A cost segregation study, prior to the demolition, identifies $1,500,000 of personal property – The property owner will now be able to write off the $1,500,000 as abandoned personal property
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Real Estate Investment Trusts (REITs) Benefit Increase non-cash expense to reduce income and thus minimize dividend distribution, allowing increased cash flow for additional acquisitions REIT dividends have 3 components: – Ordinary Dividends – Long-Term Capital Gains Dividends – Return of Capital Dividends Due to the favorable tax treatment of Return of Capital Dividends (taxed at the long-term capital gains rate of 15% or 25% and tax payment is deferred until the sale of the share), investors typically prefer dividends with the greatest percentage of Return of Capital Cost Segregation increases the Return of Capital component; thereby, increasing the Taxable Equivalent Yield DIVIDEND GROWTH IS INCREASED – A significant source of dividend growth is acquisitions REIT must pay out a minimum of 90% of taxable income as dividends, and many REITs pay out over 100% of taxable income.
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Cost Segregation Asset Class Lives for Restaurants The crux of cost segregation is determining whether an asset is I.R.C. – §1245 property (shorter cost recovery period property, 5 or 7 years) – e.g., depreciable personal property, such as equipment – or – §1250 property (longer cost recovery period property, 39, 31.5 or 15 years) – e.g., buildings and building components, which generally are not §1245 property The Director for the Retailers, Food, Pharmaceuticals and Healthcare Industry chartered a working group to address the most efficient way to approach cost segregation issues specific to the restaurant industry – The group produced a special section related to the required cost segregation study for such purposes
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Cost Segregation and 1031 Exchanges - Best of Both Worlds - Most valuable tax deferral strategies for real estate are: – Cost Segregation (Accelerated depreciation of real estate) – 1031 Exchanges (Deferral on the disposition of appreciated property) How To Best Utilize Both Strategies – Real Estate Investors and their advisors must understand issues in utilizing both strategies Real vs. Personal Property – Real and personal property under section 1031 is determined by state law – In contrast, the definition of real and personal property for cost segregation studies is determined under federal law – Property such as wall coverings, carpeting, special purpose wiring or other installations affixed to the building can be considered real property under state law and like kind for section 1031 purposes, but be considered personal property in cost segregation studies – Real estate owners can benefit from both the gain deferral under section 1031 for real estate exchanges and the enhanced cost recovery deductions of cost segregation study
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC IRS Determination/Tests - Structure or Personal? Factors that now govern whether property is permanent or can be reclassified Factors that now govern whether property is permanent or can be reclassified in accordance with IRS Audit Technique Guidelines: in accordance with IRS Audit Technique Guidelines: Permanency test - Sec. 1.48-1 (c) Is the property capable of being moved? Has it been moved? Is the property designed or constructed to remain permanently in place? Are there circumstances which tend to show the expected or intended length of affixation - i.e. may or will be moved? How substantial of a job is removal of the property & how time consuming? Is it readily movable? How much damage will the property sustain upon removal? What is the manner of affixation of the property to the land?
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC IRS Determination/Tests - Structure or Personal? Appearance and Function Test Appearance and Function Test The appearance test: – Whether the structure looks like a building – Generally only requires that the structure enclose a space within its walls and usually be covered by a roof The second part of the test requires that the building function as a building: – The courts primarily focused on whether the structure provides working space for employees that is more the merely incidental to the primary function of the structure – Both the quantity and qualify of human activity inside the structure may be considered in this regard
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Items To Be Reclassified in a Cost Segregation Study Site Improvements (landscaping/parking) Light Fixtures Branch wiring Special Plumbing Flooring Millwork Millwork Window Coverings Partition Walls Cabinetry Furnishings Shelving Wall Coverings
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Partitions Partitions Property to include: Accordion-style room – dividers Decorative lattice millwork – used to separate areas These items are not permanent structures therefore do not affect the operation nor maintenance of the building 1245 property
    • UNIQUE ASSETS TO IDENTIFY Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Primary and Secondary Electrical Distribution Systems Primary and Secondary Electrical Distribution Systems Property to include: – Main panels – Motor control centers – Transformers – Main distribution panel switchgear – Related wiring and conduit The courts conclude that the portion of the cost of the primary and secondary electrical distribution systems which is equal to the percentage of the electrical load carried to those systems allocable to the property equipment, as stipulated constitutes the 1245 qualification class property and is depreciable over an accelerated life
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Branch Electrical Wiring and Connections, and Special Electrical Branch Electrical Wiring and Connections, and Special Electrical Equipment Equipment Property to include: – Controls Battery packs – Battery chargers for emergency power – equipment Illuminated emergency and entrance signs – Medical gas control and alarm equipment – Kitchen equipment – Wired clock systems – Normally 100% of the load carried relates to this type of equipment, therefore the balance of the electrical is normally allocated to the building
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Electrical Wiring Relating to Internal Communications Electrical Wiring Relating to Internal Communications Property to include: • Conduit Wiring Electrical connections Systems supported: Call systems Intercommunicatio – n systems Dictation systems – Music systems – Paging systems –
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Wiring and Related Property Items Relating to Television Equipment Wiring and Related Property Items Relating to Television Equipment Property to include: Branch electrical wiring Conduit, floor boxes Junction boxes Outlet receptacles All other equipment in connection with its operation
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Kitchen Plumbing Kitchen Plumbing Property to include: Items relating to operation of grease trap systems Trench drains Grease waste piping Waste excavation Waste fill Trap itself All connections (hose and reel connections) Water piping used for operation of kitchen equipment
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Qualified Property Kitchen Hoods and Exhaust Systems Kitchen Hoods and Exhaust Systems Property to include: – Air intake fans & related duct work – Dishwasher condensate return units These items ventilate air, remove humidity and steam, replace air expelled Test: – Do the items relate to the buildings operation or maintenance? – NO! Therefore are considered Section 1245 property
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Sample Report – Engineering Calculations Per IRS Guidelines Office Unit of Functional Total Unit Location Measure OBS. Cost Factor Unit Cost Adj. Total S.F. Unit Cost Qty Subtotal Totals Reference Numbers Sales Floor 880 Special Finishes Vinyl Baseboard-4quot; high, .080quot; thick $ 1.78 l.f. 108 192.24 100.00% 192.24 100% 192.24 09-651-200-1150 Carpet-42 oz. Nylon $ 43.00 s.y. 98 4,214.00 100.00% 4,214.00 100% 4,214.00 09-673-800-1100 Total-Special Finishes 4,406.24 Finishes 1/2quot; gypsum wallboard- taped & finished $ 0.65 s.f. 972 631.80 100.00% 631.80 100% 631.80 09-250-700-0150 Paint $ 0.73 s.f. 972 709.56 100.00% 709.56 100% 709.56 09-910-920-1240 Total-Finishes 1,341.36 Furnishings - Window coverings-Vertical 3quot; PVC $ 9.55 s.f. 180 1,719.00 100.00% 1,719.00 100% 1,719.00 12-483-100-1500 Total-Furnishings 1,719.00 7,466.60 Unit of Functional Total Unit Location Measure OBS. Cost Factor Unit Cost Adj. Total S.F. Unit Cost Qty Subtotal Totals Reference Numbers Office #1 195 Special Doors & Windows Interior Window Glass-3/8quot; thick, tinted $ 6.90 s.f. 36 248.40 100.00% 248.40 100% 248.40 08-810-850-0600 Total-Special Doors & Windows 248.40 Doors & Windows Hollow core door-3' W x 6'-8quot; H $ 102.00 ea. 1 102.00 100.00% 102.00 100% 102.00 08-210-900-2380 Door trim-pine, 4-9/16quot; deep $ 8.35 l.f. 15 125.25 100.00% 125.25 100% 125.25 08-210-960-3020 Total-Doors & Windows 227.25 Special Finishes Vinyl Baseboard-4quot; high, .080quot; thick $ 1.78 l.f. 53 94.34 100.00% 94.34 100% 94.34 09-651-200-1150 Carpet-42 oz. Nylon $ 43.00 s.y. 22 946.00 100.00% 946.00 100% 946.00 09-673-800-1100 Carpet Padding-sponge, rubber $ 6.05 s.y. 22 133.10 100.00% 133.10 100% 133.10 09-673-600-9000 Total-Special Finishes 1,173.44 Finishes 0.00% 1/2quot; gypsum wallboard- taped & finished $ 0.65 s.f. 488 317.20 100.00% 317.20 100% 317.20 09-250-700-0150 Paint $ 0.73 s.f. 488 356.24 100.00% 356.24 100% 356.24 09-910-920-1240 Total-Finishes 673.44 2,322.53
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Sample Report – Depreciation Analysis Per IRS Guidelines Cost Segregation Analysis - Depreciation Reconciliation Total Construction Pert Client Records Dec-04 $ 1,300,000.00 $ 1,300,000.00 Land Value $ 450,000.00 Depreciable Basis $ 850,000.00 Total Depreciable Basis $ 850,000.00 111.04% Market Value Factor Total Building Cost Total Project Cost Basis Class Market Value Factor Totals 39 yr. acc 15 yr. acc 7 yrs. acc. Building Construction $ 104,090.94 15 111.04% 115,581.51 - 115,581.51 - 2100 Sitework-Im provem ents $ 33,690.60 39 111.04% 37,409.69 37,409.69 - - 3000 Concrete $ 6,528.00 7 111.04% 7,248.62 - - 7,248.62 3100 Special Concrete $ 53,650.00 39 111.04% 59,572.41 59,572.41 - - 4000 Masonry $ 5,076.00 39 111.04% 5,636.34 5,636.34 - - 5000 Metals $ 12,302.82 5 111.04% 13,660.92 - - - 6100 Special W oods & Plastics $ 27,664.00 39 111.04% 30,717.82 30,717.82 - - 7000 Therm & Moisture Protection al $ 89,015.50 39 111.04% 98,841.89 98,841.89 - - 8000 Doors & W indows $ 2,278.80 5 111.04% 2,530.36 - - - 8100 Special Doors & W indows $ 91,175.06 39 111.04% 101,239.85 101,239.85 - - 9000 Finishes $ 49,360.91 5 111.04% 54,809.85 - - - 9100 Special Finishes $ 13,814.40 5 111.04% 15,339.37 - - - 12000 Furnishings $ 141,440.60 39 111.04% 157,054.18 157,054.18 - - 15000 Mechanical $ 45,515.40 5 111.04% 50,539.83 - - - 15100 Special Mechanical $ 24,883.60 39 111.04% 27,630.49 27,630.49 - - 16000 Electrical $ 65,010.40 5 111.04% 72,186.88 - - - 16100 Special Electrical Sub-Total $ 765,497.03 850,000.00 518,102.67 115,581.51 7,248.62 Total $ 765,497.03 850,000.00 518,102.67 115,581.51 7,248.62
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Sample Report – Depreciation Schedule Per IRS Guidelines Depreciation Analysis MACRS General Depreciation System Schedule: MM/MQ/HY Conventions YR 1 2 Scenario 1:- Original Method Report Total Accum. Dep. 2004 2005 Method of Depreciation Depreciation Expense: 12/21/2004 Placed In Service 39 Year Commercial Property 12/21/2004 $850,000.00 $850,000.00 $ 909.50 $ 21,794.00 Total Depreciation $ 909.50 $ 21,794.00 DEPRECIATION DATA 12/21/2004 Total Construction $ 1,300,000.00 Land Value $ 450,000.00 Depreciable Basis $ 850,000.00 1 2 Scenario 2:- Using Cost Segregation Report sub-totals 2004 2005 Cost Depreciated Over 39/15/7/5 Years: Method/Convention of Deprec Depreciation Expense: 12/21/2004 Placed In Service Straight Line-Mid Month 12/21/2004 $ 518,103 $ 518,103 $ 554.37 $ 13,284.15 Sub-Total 39 Year Real Property $ 518,103 $ 518,103 $ 554 $ 13,284 150% MM 4th Qtr 15 year Land Improvments 12/21/2004 $ 115,582 $ 115,582 $ 1,445 $ 11,419 Sub-Total 15 Year Real Property $ 115,582 $ 115,582 $ 1,445 $ 11,419 200% - MM 4th Qtr 7 Year MACRS Property Sec. 1245 12/21/2004 $ 7,249 $ 7,249 $ 259 $ 1,997 Sub-Total 7 Year Personal Property $ 7,249 $ 7,249 $ 259 $ 1,997 200% - MM 4th Qtr 5 Year MACRS Property Sec. 1245 12/21/2004 $ 209,067 $ 209,067 $ 10,453 $ 79,446 Sub-Total 5 Year Personal Property $ 209,067 $ 209,067 $ 10,453 $ 79,446 Total Depreciation Per Cost Segregation Analysis $ 850,000 $ 850,000 $ 12,711 $ 106,146 Difference in Depreciation $ 11,802 $ 84,352 2004 Total Depreciation $ 12,711
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Sample Report – Tax References Per IRS Guidelines Tax References •2004 U.S. Master Depreciation Guide, CCH Inc: …*** Revenue Rulings: • Rev. Rul. 69-558, 1969-2 CB 4 Definition of section 38 Property • Rev. Rul. 75-78., 1975-1 CB 8 Factory air handling and safety • Rev. Rul. 75-137, 1975-1 CB 74 Dredging and excavation costs • Rev. Rul. 75-77, 1975-1 CB 7 Factory air conditioning and heating units • Rev. Rul. 81-240, 1981-2 CB 11 Individual room refrigeration units; warehouse • Rev. Rul. 80-93, 1980-1 CB 50 Land preparation costs; Electric and gas distribution systems Regulations:…** • 1.48-1 • 1.48-(a)(1) • 1.48-(e)(1) • 1.48-(e)(2) • 1.48-(c) Revenue Procedure 88-35 LSMB Field Directive Court Cases: • Hospital Corp of America, et. Al. v. Commr, 109TC No.2 *** • Morrison v. Commr, T.C. Memeo 1986-129*** • Whiteco Indus., Inc. v. Commr, 65 T.C. 664,672-673(1975)*** • Central Citrus Co. v. Commr, 58 T.C. at 374*** • Scott Paper Co. v. Commr, supra,*** • Fed. Sav. And Loan Association v. United States, 313 F. Supp 294-96 *** * Denotes, in text ** Denotes, referenced in text *** Denotes, reference material
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC The Cost Segregation Study Process Continued… Electrical Site Work Landscaping
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC The Cost Segregation Study Process Prepare final reconciliation Prepare final report Deliver Draft Review with tax advisor Deliver Final Study with sample 3115
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Summary Time Value of Money • Dramatic reduction in taxable income • Increased cash flow for investment opportunities and • business expansion Property tax savings • Insurance savings • www.bestbottomlines.com (888)-598-9667
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC I.R.C § 1031: Key Points A 1031 Exchange rolls the gain from the sale of an Old Property into a New Property - Without having to pay tax There is no limit to the number of times you can do a 1031 Exchange Hold Property 1 year + 1 day –
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Property Use and Title Property given up and property received must be held for productive business use or investment Real Property – Personal Property – Property given up and property received must be held by the same taxpayer (i.e. Same Tax ID #)
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Timeline Rules 45 Day Identification Period – The Exchangor must identify the potential replacement property by midnight of the 45th day from the date of the sale 180 Day Exchange Period – The Exchangor must acquire the replacement property by midnight of the 180th day, or the date the taxpayer must file its tax return (including extensions) for the year of the transfer of the relinquished property, whichever is earlier
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC §1031 Exchange Timeline 45/180 Day Rules Start Finish Identification Date Day 1 Day 180 Day 45 Close of Escrow Close of Escrow ID Form Due On Purchase On Sale Property Property To AEC (AEC to fund (Net Proceeds to AEC) proceeds)
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Replacement Identification Rules 3 Property Rule – Three properties of any value OR 200 Percent Rule – Any number of properties as long as their combined fair market value does not exceed 200 percent of the value of the sold property OR 95 Percent Rule – Any number of Replacement Properties, of any value, but only if the Exchangor buys at least 95% of the aggregate fair market value of all identified Replacement Properties
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Reinvestment Requirement Equal or Up Purchase price of NEW Property must be – equal to or greater than the net selling price of OLD Property Reinvest All The Cash You must reinvest all of the cash. Any cash – you touch will be taxable
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Constructive Receipt What is Constructive Receipt? Main Reason Taxpayers ‘flunk’ §1031 – Funds credited to taxpayer account or made available for use – Funds credited to a “Disqualified Person” on behalf of taxpayer are treated as credited to taxpayer Safe Harbor from Constructive Receipt – Qualified Intermediary
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Functions of QI Prepare Documentation Act as Trustee Funds – Deferred Exchanges – Property – Reverse Exchanges – Consulting
    • AEC 1031 Exchange, LLC Reverse Exchange Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC AEC 1031 Exchange, LLC Basic Concept Buy a New Property BEFORE Selling Old Property
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC Advantages of §1031 Exchanges Why Do A Reverse Exchange? Act quickly to acquire New property Old property sale is delayed Effectively extends 45 and 180 time limits Allows adequate time for Due Diligence
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC §1031 Exchange Timeline Reverse Exchange - 45/180 Day Rules Finish Locate Identification Date New Day 180 Property Day 45 Close of Escrow ID Form Due Due Diligence Period Close of Escrow On New Purchased On Sale of Old To AEC Property Property
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC AEC 1031 Exchange, LLC Key Point Taxpayer cannot receive and own both OLD and NEW property at the same time
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC AEC 1031 Exchange, LLC Two Reverse Methods Give up OLD property to 1. ‘EAT’ before receiving NEW property NEW property is received by 2. ‘EAT’ and held in trust for taxpayer until OLD property is sold
    • Best Bottom Lines, LLC Best Bottom Lines, LLC Best Bottom Lines, LLC AEC 1031 Exchange, LLC Business started as Alaska Exchange Corporation (AEC) Over 20 years experience 1000’s of Exchanges – all 50 states Interest paid on trust funds Specialize in providing exchange strategies and guidance