Code and Legal Topics
March 2009
Engineering
Based Cost Segregation Can Fund Your Property Maintenance.
With hard times comes the necessity of raising the money
for maintaining commercial properties while dealing with a
reduced rental cash flow. One strategy may lie in reaping
the tax benefit of cost segregation analysis - investing the
proceeds into your building (on a cost segregated basis of
course) and getting another tax benefit for next year.
Engineering-based cost segregation is an IRS approved tax
strategy tool that can help significantly reduce the tax burden
for investment property owners. Owners of investment property
with a cost basis over $1M and and who pay taxes, owe it to
themselves to at least investigate cost segregation.
Contrary to what most of us think, the majority of investment
properties use straight-line depreciation (27.5 or 39 years).
Cost segregation breaks out and accelerates depreciation on
specific assets allowing for 5, 7 and 15 year accelerated
depreciation. Existing as well as new properties can qualify;
the study can also capture missed depreciation from years
past.
The importance is in the details…
Cost segregation is complicated, very time consuming and needs
to be very detailed. It is also something that needs to be
done by a professional. Depreciation is not just calculated
by the asset itself, but what the asset is used for, when
it was purchased, etc. There are items that appear straight
forward but just aren’t so simple.
For example, consider the
lowly electrical outlet - one of hundreds of building components
subject to a cost segregation analysis:
| Asset |
Straight
line Depreciation |
Cost
Segregated Timeline |
Notes |
| Electrical
Outlet |
27.5
or 39 years |
5
Years |
Depending
on asset location and use |
| Metal
Conduit |
27.5
or 39 years |
5,
27.5 or 39 years |
Percentage of
asset accelerated depending on location and use |
Copper
Wire |
27.5
or 39 years |
5,
27.5 or 39 years |
Percentage
of asset accelerated depending on location and use |
Circuit
Breaker |
27.5
or 39 years |
5,
27.5 or 39 years |
Percentage
of asset accelerated depending on location and use - in
tandem with quantification of applicable percentage
of main electrical service |
Distribution
Panel |
27.5
or 39 years |
5,
27.5 or 39 years |
Percentage
of asset accelerated depending on location and use - -
in tandem with quantification of applicable percentage
of main electrical service |
Main
Distribution Panel |
27.5
or 39 years |
5,
27.5 or 39 years |
Percentage
of asset accelerated depending on location and use - -
in tandem with quantification of applicable percentage
of main electrical service |
Here is a recent case study that illustrates
the potential of the tax strategy.
| Apartment Complex Case Study |
|
Cost Basis of the structure |
$22,531,940.00 |
Cost reallocated |
$5,815,394 |
Reallocation percent |
25.8% |
1st year deferred tax (not including
long term) |
$367,412. |
Total deferred tax |
$1,196,015 |
Guidelines for choosing the right cost segregation company
- your provider should
- have the highest amount of experience you can find
- should offer a no cost, no obligation estimate detailing
the cost and the estimated benefits.
follow the IRS Audit Techniques Guide and should meet or
exceed the 13 Elements of Quality (to greatly reduce audit
risk).
- reconcile all of the components to the project and lists
out the longer term as well as the accelerated components
(critical because it provides accurate values for writing
off replaced assets).
Property owners use cost
segregation to help them pay for construction and remodels,
which often increases business for the property owner or
provides the ability to lease a property easier.
About our contributor -
Commercial Property Consultants is a leader in engineering-based
cost segregation with over 10,000 studies accepted by the
IRS and over $1B in benefit for its clients. CPC uses the
most accurate methodology, offers the no obligation, no
cost estimate and will meet or exceed the 13 Elements of
Quality. Contact info: Susan.Nichol@cpconsultant.com
408.250.9262
TiCon - "You get it on time
or you get my car keys" - Sam Burkhouse
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