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Hidden Treasure in Your Property

One of the largest concerns with today’s commercial property owners is finding ways to improve cash flow which can be in turn used to reinvest in new ventures. Many of these owners are finding help through an unusual source to make their goals a reality. A new vista for accelerating depreciation, due to recent IRS rulings and court cases, is paving the way for property owners to cut taxes and free up cash for investments.

Businesses are accustomed to depreciating commercial real estate over a lengthy 39-year period and residential property over a slightly shorter 27.5-year period. A cost segregation study can shorten these time frames. In 1999 the IRS issued a memorandum allowing the classification of buildings costs into different categories. This action has enabled cost segregation studies to facilitate tax saving opportunities.

In summary, a cost segregation study allows more depreciation be taken upfront. The process separates out non-structural costs from structural real property costs, thereby facilitating depreciation of a business’ personal property and land improvements over a much shorter time period. Electrical, plumbing, site work, HVAC and millwork are common areas for such cost allocation.

The actual amount of real savings and other benefits depends on the type of property and its specific construction expenditures. Most facilities can derive some benefits. An estimated after-tax savings of five percent of an asset’s depreciable basis can usually be realized annually over the first 10 years of the depreciable term, but after-tax savings as high as 15 percent for certain property types are not unusual.

The initial benefits for a property owner from a cost segregation study include reducing corporate or individual income taxes in the near term, providing corporations and investors with increased cash flow, allowing for future write-offs when structural components are replaced. It is important to note that taxes are deferred, not eliminated.

Now that your interest has been captured with the benefits, how do you know if your building qualifies? Cost segregation studies can be done for acquired, constructed properties and for existing buildings that are undergoing renovations or expansions. The tax savings will vary. Sometimes 20 to 40 percent of a project’s costs can be re-classified as personal property and land improvements, which have far shorter “depreciable” lives.

The most important question now, is how do you qualify? An owner’s property must have been acquired, renovated or improved after 1986. Excellent candidates include manufacturing facilities, hotels and office buildings as well as high-end tenant improvements. Big-box retailers, warehousing and distribution centers, self-storage facilities and multi-family buildings are also applicants for cost segregation depreciation benefits. These properties often have extensive site preparation work and personal property.

Stephen J. Ritmiller, CPA, is Director of the Real Estate Services Group for Alpern Rosenthal. He can be reached at 561-689-7888 or sritmiller@alpern.com.

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