Commercial Property Owners Could Save Substantially On Federal Taxes With a Cost Segregation Study Larry Rosenblum CPA, Principal Cost Segregation Solutions LLC 866-544-9770
What is a Cost Segregation Study? Cost Segregation is the process of separating the costs of tangible personal property, other tangible property, indirect costs and land improvements from building and improvement costs.
Why Do a Cost Segregation Study? A cost segregation study allows taxpayers to pull out different components of total building cost which will enable them to accelerate depreciation deductions and reduce income taxes. (Current tax law dictates utilizing depreciable lives of 39 years for commercial real estate and 27 ½ years for apartment buildings and assisted living facilities.)
Which Properties Are Candidates for Cost Segregation Studies? Commercial properties: offices, retail, warehouses and assisted living facilities or apartment buildings with construction cost or purchase price over $1 million after 1986.
Types of Facilities That Can Benefit from Cost Segregation Studies <ul><li>Retail </li></ul><ul><li>Offices </li></ul><ul><li>Hotels </li></ul><ul><li>Restaurants </li></ul><ul><li>Apartments </li></ul><ul><li>Hospital/Medical Facilities </li></ul><ul><li>Manufacturing </li></ul><ul><li>Warehouses </li></ul><ul><li>Mixed Use Facilities </li></ul><ul><li>Banks </li></ul><ul><li>Grocery Stores </li></ul><ul><li>Leasehold Improvements </li></ul>
If the Building Was Purchased in the Past, Can You Change Prior Years’ Depreciation? Yes. A look-back study can be performed to claim depreciation not previously deducted for up to 10 years in most cases. The catch-up may be claimed on the next tax return without amending previous returns.
Which Properties Are Not Ideal Candidates for Cost Segregation Studies? <ul><li> Properties that are currently for sale without a like-kind exchange strategy – 1031. </li></ul><ul><li> Properties with construction cost or purchase price below $1 million </li></ul><ul><li>Properties owned by entities that do not have a taxable income </li></ul>
The Cost Segregation Process <ul><li>A coordination of effort with the client, the property manager and the cost estimator. </li></ul><ul><li> Plans and blueprints are reviewed to highlight specific areas for considerations. </li></ul><ul><li>Construction documents and closing statements are reviewed and reconciled to actual amounts spent. </li></ul><ul><li>A physical walk through of the property helps document specific items to be considered. </li></ul><ul><li> Cost allocation of indirect costs such as labor professional fees and general conditions. </li></ul>
Landmark Case in Cost Segregation: The Hospital Corporation of America Challenges the IRS In this 1997 case, the Tax Court concluded: Certain assets in the hospital facilities could be considered personal property and depreciated over a 5-year period. Judge’s Memorandum (April 1, 1999) “… the use of cost segregation studies must be specifically applied by the taxpayer.” IRS Memorandum (April 1, 1999) “ An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer’s estimates or assumptions that have no supporting records.
How Much Have Commercial Property Owners Saved? Representative recent studies: Cumulative Facility Cost Present Value Office Building $ 5.1 million $ 150,000 Retail Center $18.0 million $1,200,000 Art Gallery $ 3.0 million $ 90,829 The average return is approximately $15 for every $1 invested in a study.
Bonus Depreciation Means Greater Savings Bonus Depreciation. Qualifying assets placed in service during specific periods may be eligible for bonus depreciation in the first year. Qualifying Assets Placed in Service % Bonus Depreciation in the first year 01/01/08-12/31/08 50% 05/06/03-12/31/04 50% 09/10/01-05/05/03 30%
The results of a Cost Segregation Study performed for the owner of an $11 million dollar retail facility with a major national tenant. $247,920 $445,830 $197,910 $69,269 The Study saved this client: $69,269 on his taxes in the first year. $443,106 on his taxes over five years. Present Value Tax Savings With Cost Segregation Additional Deduction With Cost Segregation With Cost Segregation Without Cost Segregation Total Tax Deductions (Year 1) Total Tax Deductions (Years 1-5) Depreciation Period Percentage Classified $1,379,504 $2,645,522 $1,266,018 $443,106 39 Years Varied Years* 100% Varied Percentages** Present value tax savings utilize federal tax rate of 35% and discount rate of 6%
The Cost Segregation Study separated different components of the property eligible for shorter depreciation lives. Varied Years * 39 Years 15 Years 5 Years Resulting in: $445,830 in tax deductions the first year. $2,645,522 in tax deductions over five years. Segregated Deductions for Property Components Total Total Tax Deductions (Year 1) Total Tax Deductions (Years 1-5) Varied Percentages * * 73% 18% 9% $445,830 $181,121 $92,688 $172,021 $2,645,522 $1,009,101 $756,277 $880,144
What Qualifications Are Needed to Prepare a Supportable Study? The cost segregation study preparer must: Have an in-depth knowledge of the applicable Internal Revenue Code, Sections, recent Tax Court rulings, IRS Actions on Decisions, Chief Counsel’s Advisories and Technical Action Memoranda. Understand the procedures necessary to develop a report that can withstand IRS scrutiny.
Why Choose Cost Segregation Solutions? With 25 years of experience performing cost segregation studies for a broad array of industries, we have proven methods for maximizing your deductions and obtaining the greatest cost savings available for your situation. We have highly qualified personnel with many years of construction and estimating experience. Cost Segregation Solutions finds deductions that less experienced firms may miss. The result is greater savings for you.
Call for a free consultation to find out if you could Save Money with a Cost Segregation Study: Larry Rosenblum 866-544-9770 www.costsegsolutions.com