Cost Segregation StudiesEnhanced Income – Decreased Federal Taxes

Cost Segregation

Studies

• Cost Segregation is a ‘Smart Tax Strategy’

• Valuable but not yet commonly utilized tax strategy

• For Commercial, Investment & Multi-Family Property Owners

• Allows increased cash flow & defers federal tax liabilities.

What is it?

• Purpose is to identify real property §1250 and personal property §1245

• By doing so, personal property assets can be depreciated in 5, 7 or 15 year periods.

• Without, the entire property is depreciated over 27.5 yr (multi-family) or 39 yr (commercial) periods

Is this right for your client?

• Property ownership no early than 1987? * Sweet spot is last 1-7 years

• Commercial, investment or multi-family?

• Improvements in property since ownership?

• Minimum $500,000 value? (practical)*Cumulative property value okay

• Income to shelter?*1000 hrs working in/on RE holdings

• Three year hold? (practical)

So what does this m

ean?

• Immediate increase in cash flow through accelerated depreciation deductions

• Reduced income taxes (and perhaps a case for real estate property tax reduction)

• Typically 10-40% of a properties value can be classified in personal property classes

Before Cost segregation

• 3 Million dollar Apartment

• 80% depreciated over 27.5 years = $87,273.00 per year

• 20% typically and often arbitrarily assigned to land

• Land cannot be depreciated

After Cost segregation

• 3 Million dollar Apartment

• 25% identified as 7 yr personal property = $750,000.00

• New depreciation claimed = $167,142.00

• About doubled depreciation – additional $79,869.00

• 35% tax bracket means a savings of $27,954.00

Other pertinent info

• Returns need not be amended, depreciation ‘catch up’ is allowed

• Land can be assigned a value less than std 20% thereby increasing value that can be depreciated

• Cost segregations don’t create more depreciation but rather re-allocate / front end load.

• Comes down to a ‘Net present Value’ opportunity

• Average property hold? 7 years. Also creates value

• Average cost of a study: $5k to 15k

• New Construction is eligible. Good time to do.

Who can perform

a CSS

• Construction Expertise

• CPA with Core Competency

• Cost & Estimating Experience

• Familiar w/ IRS CSS guidelines

Litmus Test for Personal

Property

• FunctionIntegral to property orOperation of Business

• Move-ability

• Accessorial

• Sole justification

How

it’s done

• Physically Inspect property

• Photos, blueprints, contracts

• Analyze cost data

• Prepare an itemized list of personal property

• Assign value to each asset (RS means or like)

• Reconcile and prepare Final report

• Engineer, appraiser & CPA like team needed

Property Examples

• Airport Hangars • Apartment Buildings • Automobile Dealerships • Automobile Service Centers • Banks • Restaurants • Day Care Centers • Department Stores • Distribution Centers • Fitness Centers • Flex

More exam

ples

• Golf Courses • Hospitals • Hotels • Laboratory/Research Facilities • Manufacturing and Processing Facilities • Marinas • Medical/Surgical Facilities • Nursing Homes/Assisted Living Facilities Office

Buildings • Post Office • Resorts • Restaurants • Shopping Center • Warehouses

How

to Market C

SS

• Increase reputability w/ clients

• Offer as deal maker

• Incentive Seller includes for slow moving property

• To buyer to help close the deal

• New contact point for a Call on past clients

• Use for your own investments

• Re-investment of Tax Savings into new property

• May provide additional ammunition for Property Tax Appeal

Team Effort

Commercial Property Owner

Brokers and Other Experts

CPA / Tax Advisor

Cost Segregation Professional

Example

• EXAMPLE: OFFICE BUILDING

• New construction with capitalized costs of $9,985,548

• Reclassified by tax life: 

• 5-Year - 6% - $547,957

• 7-Year - 18% - $1,758,915

• 15-Year - 6% - $646,615

• 39-Year - 70% - $7,032,061 ·

• Present value tax benefit of $469,383

Example

• EXAMPLE: MEDICAL MANUFACTURING FACILITY

• New construction with capitalized costs of $10,400,110

• Reclassified by tax life:

• 7-Year - 20% - $2,014,402

• 15-Year - 15% - $1,637,327

• 39-Year - 65% - $6,78,381 ·

• Present value tax benefit of $504,535

Example

• EXAMPLE: MULTI-FAMILY

• New construction with capitalized costs of $17,460,314

• Reclassified by tax life:

• 5-Year - 11% - $1,921,360

• 7-Year - .1% - $13,260

• 15-Year - 19% - $3,364,612

• 27.5-Year - 70% - $12,161,081 ·

• Present value tax benefit of $514,926