Commercial Real Estate Owners
If your company owns a building or for liability protection purposes you have structured a holding company, let’s make the assumption that both commercial real estate owners and investors are interested in reducing and/or deferring their taxes. Cost segregation studies and 1031 Exchanges are two of the most valuable tax strategies available to real estate owners today.
By utilizing a strategy that combines both, a property owner may reduce operating expenses and defer capital gain taxes. However, property owners should take into consideration some important factors.
Cost Segregation, aka “The Commercial Property benefit,” is a Federal program designed for business owners who own commercial properties, or have performed significant leasehold improvements. Depreciation is a method of allocating the cost of a tangible asset over its useful life. A Cost Segregation Study dissects the construction cost or purchase price of the commercial property that would otherwise be depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation study is to identify all property-related costs that can be depreciated over 5, 7 and 15 years. This Commercial Property Benefit provides an opportunity to significantly reduce federal taxes and improve cash flow. Targeted industries that stand to benefit include: Hotels, Restaurants, Apartment/Nursing Complexes, Office/Retainer Complexes, Shopping Malls, Manufacturing Facilities, Funeral Homes, Dealerships, Golf Courses, Grocery Stores and Medical Facilities.
Cost Segregation traces its roots as far back as the Tax Reform of 1986, but went through significant changes in 2004 making it more accessible for small and midsize property owners to take advantage of. The most recent changes appeared as late as February 2009 in the American Recovery and Reinvestment Act. This is an engineered based program that focuses on the components of the building. 90% of all commercial properties qualify for this program.
To create a valid cost segregation study, the IRS requires that an actual study be performed. A specialized company or an accounting firm utilizing engineers and/or construction management professionals typically prepares these studies. A proper cost segregation study requires a knowledge of accounting, tax law and construction. An engineering report should segregate the real estate asset into four categories: land; land improvements; building and structural components; and tangible personal property. Generally, a cost segregation study will reclassify 25 to 50% of a building as personal property for depreciation purposes. By doing this, depreciation deductions are increased and taxes are reduced.
When Performing a Cost Segregation Study the First Step in Production is to Conduct a Feasibility Study.
The Feasibility Study provides an analysis of the Client’s current depreciation standing and allows us to determine if a Cost Segregation study is (1) feasible, (2) feasible within the estimated cost to perform the study, and (3) will have the appropriate ROI for the Client. Feasibility Studies are almost always performed at the kick off of any project where large sums are at stake.
What Are the Tax Benefits of a Cost Segregation Study?
The benefits from a cost segregation study will vary based on the depreciable basis of the improvements, property type, and the amount of short-life assets the property has.
Benefits to Owners
- Increase Cash Flow
- Minimizes Taxes
- Catch Up Benefit (No Amending Returns)
- Free up Money for Investments
Items Typically Reclassified
- Site improvements (landscaping/parking)
- Light Fixtures
- Branch Wiring
- Special Plumbing
- Partition Walls
- Wall Covering
The following are actual results that were produced by KTC’s team: Growth Management Group, a team made up of the country’s foremost Project Managers, Engineers, IP Attorneys, Industry Specializes, and Property Tax Attorneys
- Korean Grocery Store Chain – Savings: $3,000,000
- Comfort Suites Hotel – Savings: $630,000
- Holiday Inn – Savings: $950,000
- Manufacturing Company – Savings: $1,000,000
- Convenience Store – Savings: $73,000
- Dermatology Office – Savings: $89,000