Cost Seg Building

A Blog About Tax Savings for Building Owners

Month: March 2023

Cost Segregation for Mobile Home and RV Parks

March 28, 2023 /

We all know that mobile home parks and RV parks kick off tremendous cash flow for the owners. It’s a phenomenal real estate investment. There are many different groups of investors who have been trying to buy as many of these parks as they can get funds to do so. In part what they do is they buy these and then immediately cost seg them for massive income tax savings.

If you’re reading this blog post you probably already have a pretty good idea about cost segregation, but in case you don’t, cost segregation is a tax planning strategy where the owner segregates or reclassifies real property into shorter class lives. This allows the owner to take a bigger tax deduction earlier in the ownership of the property.

Mobile home parks and RV parks are some of the best assets for cost segregation. I will often get asked…”how might a specific property do with cost segregation?” I can usually give them a ballpark figure and then have our team run an estimate but other than C-stores and tunnel car washes, there isn’t another asset class that performs as well with cost segregation as does a mobile home park or RV park.

It’s very common for us to see 50-70% of the overall cost be able to be accelerated – i.e. depreciated in the first year of ownership. Let’s say you buy a mobile home park for $2.5 million. The land is worth $750,000. That leaves $1.75 million in cost basis. We would run an estimate for you and note that you could expect $800,000 – $900,000 in increase accumulated depreciation expense. But the actual results might reach as high at $1.5 or $1.6 million potentially. Of course we would not know that until we completed the study. So what happens in these situations is many times these owners have other parks that kick off massive cash. They have big tax liabilities because of that. But now they buy this new park, cost seg it and get maybe a $1 million tax deduction in that first year of buying the new mobile home park. They don’t need that $1 million to offset the income from this newly acquired park but they do need it to offset the other income from their other parks and properties. A cost segregation study like this might cost somewhere in the neighborhood of $5,000 – $7,000 depending upon the complexity of the property.

What kinds of property can be accelerated? Below is an example of what you might see in a cost segregation study for a mobile home park. In this particular study, the owner would be able to accelerate $2,141,369.70. At a 37% federal income tax rate, that would be an income tax savings of $792,306. I don’t know what this study cost but let’s say it was $6,500 which is a business write off. That $6,500 after tax is $4,095 making the ROI 193:1….that’s 19000% return on investment. Crazy but it’s legit.

If you’d like to learn more about cost segregation or would like us to run an estimate for you, please reach out. We are happy to run numbers for anyone no matter where you are. There is no charge and no obligation. I can study properties anywhere in the United States and am happy to help.

John Murphy CSSI

Unlocking Hidden Tax Benefits: Why Property and Casualty Insurance Agents Should Offer Cost Segregation to Clients

March 18, 2023 /

Property and casualty insurance agents and brokers could offer even greater value and service to their commercial lines clients if they offered cost segregation services.

P&C agents and brokers are talking with commercial building owners on a regular basis about their insurance needs. Inevitably their client base owns commercial buildings and perhaps some multi-family, short-term rentals and rental homes. It’s an easy conversation to have with a business owner whom you know owns a building because you are either insuring it or you are hoping to win his business and insure it going forward. As part of that conversation, why not ask, “BTW, have you done cost segregation on your building for tax savings?” That’s it. If they have done it, great, but if the response is like what I find about 8 out of 10 times the owner hasn’t and he knows little to nothing about it. It’s then just a matter of, we’ll have our guy run an estimate for you and you can then run it past your tax advisor to see if this might be something you can utlize. On average, building owners save between $30,000 – $70,000 per $1 million in basis or building costs.

You can then reach out to me with the specifics on the building because you likely have it in your database already. Many times I can look up most buildings, but we need the following:

  • Address
  • Building type
  • Date of Purchase or In-Service Date
  • Purchase Price
  • Land Value (est)
  • Improvements – year / type

Within a day or two, we will turn around a custom estimate for this owner to save on his/her income taxes. Many times the building owners will see a return something in the neighborhood of 10x what they will invest in the study. Meaning, let’s say the study costs $5,000. The owner’s tax rate is 32%. His net cost after tax would be $3,400. If he saves $50,000 on his income taxes, that’s an ROI of 14:1 or 1,400% return on his investment in the study.

As a property and casualty insurance agent or broker, we’ll do a revenue share of 10% on our study fees. That $5,000 study will generate $500 for your agency. This would likely be for a $1-$1.5MM building. Smaller buildings have smaller fees. Bigger buildings would have bigger fees. How many buildings does your agency insure? If my experience is that about 8 out of 10 are unware of this tax application, don’t you see how you could be a big help to these building owners to help them save on taxes, increase cash flow and maybe help them stay in business?

Lastly, I have heard that insurance premiums for commercial lines have gone up 15-25% in the past year. What if you had a solution to help that business owner when you call him to discuss his renewal for the upcoming year and you’re concerned about possibly losing a client because his rates are going to jump by thousands of dollars. Well, this might be a solution. He might have a building or two that he has not done a cost segregation study on that might generate lots of tax savings which could afford him the cash flow to more easily pay for the increased insurance premium.

And when your agents are on the phone prospecting talking about insurance, this is a another way to try to engage the building owner. Who knows…maybe he’s not ready to buy insurance from you just yet but he does cost segregation because you introduced it to him. Perhaps that will engender some favortism toward you when he does go to re-evaluate or renew his insurance coverages in the coming year.

Cost segregation is a terrific value-add service for property and casualty agents and brokers. It’s a great way to help your clients and to differentiate yourself from the competition. On top of that, it’s an additional revenue opportunity for the agent and agency. Reach out if you’d like to discuss. I work all across the U.S. in all 50 states. One does not need to be licensed to offer cost segregation. John Murphy 864-276-1448.

The views expressed are my own. I do not speak or write in any official capacity for the firm I represent for cost segregation – Cost Segregation Services, Inc.

John Murphy Cost Segregation Service, Inc. "Unlocking Hidden Tax Benefits: Why Property and Casualty Insurance Agents Should Offer Cost Segregation to Clients"

Biden Proposes Eliminating 1031 Exchanges with 2024 Federal Budget

March 13, 2023 /
Photo: New York Times

President Biden is at it again…this was attempted a couple of years ago but went no where. No it’s back again. The Biden Administration wants to see the 1031 Exchange loophole for the rich eliminated when they negotiate the 2024 budget with Congress.

Certainly rich people use 1031 Exchanges to defer taxes but it is also used by many others who would not consider themselves rich. It’s a highly popular tax strategy as you can imagine among real estate investors. I am not privy to their negotiations nor do I have an insider who might be representing the real estate industry onn this deal but it sure seems to me that Biden is throwing this out there to use as a negotiating tactic or bargaining chip for something else.

It seems difficult to believe they would just eliminate the 1031 Exchange. However, I could see they doing a phase out or a cap depending upon the amount of taxes deferred either per deal or cumulatively. If this ends up being the road this goes down, I’d like to see a counter balance be to extend 100% depreciation indefinitely instead of having bonus depreciation drop by 20% each year until it is zeroed out by 2027. Eliminating 1031s or putting some kind of cap in place would slow down some transaction activity I believe. A counter to that might be extending the 100% bonus depreciation ability. The bonus depreciation helps drive transactions as well. Transactions are good for the enconomy. We want to see more of them rather than fewer of them.

In the event someone reads this who has any influence on this, please remove the sunset provision in the current tax law and immediately bump bonus depreciation back to 100% and make it permanent with no sunset provision.

Understanding the Impact of Tangible Property Regulations on Landlords and Tenants: Capitalization vs. Expense Deduction for Tenant Improvements

March 13, 2023 /
Tenant Improvements – Photo Credit John Murphy, Cost Seg Building

Are you looking to do tenant improvments (TIs) to your building? Are you aware that the Tangible Property Regulations (TPRs), i.e. repair regulations, are to your benefit as a building owner? There are specific guidelines to help building owners save money on their taxes when it comes to TIs. Many times we see that owners have capitalized items that could have been expensed. Not only is that the incorrect way to account for some items, the IRS doesn’t want you to do it that way and it’s costing you quite a bit in lost tax savings.

The words lessee and lessor in §1.162 and §1.263(a) (Tangible Property Regulations) are mentioned over 200 times. The TPRs are a dramatic change for landlord and tenants regarding the capitalization or expense deduction of tenant improvements.

There are two critical general rules under §1.263(a) for leased property and improvements.

The first general rule is that an improvement to a unit of property is NOT a separate unit of property from the building. The second general rule is if the landlord’s expenditure is NOT a restoration, adaptation, betterment, or improvement (RABI), then it is repair and maintenance.
The unit of property for a taxpayer who is the lessee of an entire building is each separate building, its structural components, and building systems.

If the lessee leases only a portion of a building (such as an office, entire floor, or specified square footage), the portion of each building and the building systems associated with ONLY the leased portion is the unit of property. If the lessee pays for the tenant improvements, the lessee must generally capitalize the related amounts, which it pays to improve the tenant space. The only exception is if §110 applies. §110 is a construction allowance received by the lessee for the sole purpose of the improvement or when the improvement constitutes a substitute for rent.

In other words, tenants who do not lease the entire building and pay for their tenant improvements have their separate unit of property, and those improvements must be capitalized under the UNICAP rules §263A.

If the landlord pays for the tenant improvements, they must be put through the RABI rules (restoration, adaptation, betterment or improvement) to determine if the tenant improvements are a repair and maintenance item or if they must be capitalized. Generally, an amount capitalized as a tenant improvement is not a separate unit of property from the building. If the landlord’s tenant improvements are not a separate unit of property from the building, the landlord can compare the expenditure against the whole building, building structures, and building systems. The result will be that most landlord tenant improvements, (beyond the initial tenant improvements capitalized for each space), will be classified as a repair and maintenance expense.

Example

The landlord owns and operates two buildings. One is a 4-story office building of 40,000 square feet with the first floor consisting of retail space. The other building is a stand-alone 10,000-square-foot retail building. The landlord has two new tenants move in 2022. Tenant A leases the first floor of the 4-story building. Tenant B leases the stand-alone building. The landlord already had prior tenants in those spaces and has tenant improvements on its books for both of those building spaces. The landlord tears out the previous tenant improvements and does extensive new tenant improvements for both tenants.

Conclusion

The landlord can expense the tenant improvements for Tenant A in the office building but must capitalize the tenant improvements for Tenant B. The reason he can expense the TIs for the office building is that the space being renovated consists of only 25% of the building. The Tangible Property Regulations allow that if you are improving less than 30-35% of the building that those costs might be able to be expensed instead of capitalized. However, we will often see that owners have indeed capitalized such items.

Regarding Tenant B, the landlord must capitalize those improvements because because it’s 100% of the property. However, they can do a partial asset disposition (PAD) and get a significant tax deduction for the removal of those previous tenant improvements that had been in the building. PADs must be completed in the tax year in which the work (improvement / renovation) was done.

So what’s the difference between these two buildings? The landlord replaced a large physical portion of the stand-alone building that B occupied but only improved 25% of the building that tenant A was to occupy.

If you are a building owner and you are doing tenant improvements, reach out to consult with me at no charge. We can discuss your situation and see if it makes sense to expense or capitalize your improvements and whether or not it might qualify for a partial asset disposition.

The original article appeared on CSSI’s website and has been updated here at Cost Seg Building.

Upstate Shines: Spartanburg and Greenville-Anderson-Mauldin take Top Honors in Site Selection Magazine’s Top Metros of 2022

March 13, 2023 /

The Upstate of South Carolina continues to be a top area in the U.S. for site selection for companies not only in the U.S. but around the world. Greenville, Mauldin, Anderson and Spartanburg continue to be at the top of the list for many companies. It’s a great area to live and do business and the location in between Charlotte (1.5 hours) and Atlanta ( about 2.5 hours) away make it a great location especially for transportation. On top of that, it’s a beautiful area. Check out what the Upstate SC Alliance had to say on LinkedIn.

The Collapse of Silicon Valley Bank: Implications for Commercial Real Estate and the Tech Industry

March 10, 2023 /

And out of nowhere with almost no warning, the most important bank in Silicon Valley imploded this week. Fed Chair Jerome Powell was testifying in Congress and once again causing turmoil in the American markets midweek. Yesterday there were news stories about Silicon Valley billionaire, Peter Thiel and his Founders Fund telling people to get their money out of Silicon Valley Bank…that was yesterday. Today the bank has failed and the Feds have stepped in. My understanding is that actually the State of California closed them down and then immediately the Feds stepped in.

On CNBC today there was lots of talk about what will happen next. No one really knows. The numbers I hear kicked around is that this was a $200 Billion bank. The FDIC insures accounts up to $250,000. Word is that nearly all the accounts had more than $250,000 in them. The fallout is likely to be massive. Even if the U.S. Federal Government steps in somehow to try to make these people whole again, that will take time and I would think a lot of political clout. After all, we are talking about venture capitalists, Silicon Valley millionaires, tech start ups etc…does the country really want to bail these folks out?

So many companies will likely miss payroll starting on Monday. I’ve heard some tech execs will fund payroll themselves next week which is a nice gesture, but how long do they plan to do that? How long can they do that? When do they think the cavalry will come riding in to save them? I’m thinking at a minimum this is going to take months and possibly years to sort out. How much of the $200 Billion can be recovered? No one knows yet. Might be only be 10-20%? Possibly.

So are we near the end of the malaise and the slide in equities and home prices due to the Fed’s record breaking raising of interest rates to fend off inflation? I doubt it. It seems to me that SVB is the first big crack in the system and there will be more of this to come. We have only just begun to reset when it comes to residential and commercial real estate and the Fed is showing no signs of pivoting any time soon.

So what will be the impact on commercial real estate in Silicon Valley? I’m writing about this all the way across the country in beautiful Greenville, SC. I spent nearly a decade living in the San Francisco Bay Area so I have a particular affinity for the area and love following what is happening. I would expect many companies will fail as a result of SVB going under. They won’t have the cash to continue and that will have an impact on space they have leased. But knowing California and Silicon Valley, they’ll work their way through this over the next 18-24 months and soon enough this episode will be behind them. But in the meantime, there is likely to be a lot of pain and difficult times ahead for many individuals, companies and investors.

Will there be a ripple effect across the U.S. in terms of business investment and commercial real estate investment? It’s too early to tell. It will depend upon how big and dramatic things get as this unfolds. The market was already tightening up. Financing has been much more difficult the past 6 months or so. I would think that’s about to get even more difficult. Perhaps the Fed wants to keep pushing until we go right to the edge before the overall broader market siezes up. Let’s hope we aren’t going to get pushed to the edge again like 2008. No one wants to see that again.

Will Silicon Valley Bank be able to find a buyer?

CNBC just published an article on how the second largest bank failure in U.S. history went down.

A New York toy company is in jeopardy after Silicon Valley Bank collapses.

Solar companies impacted by SVB.

Associated Press – Silicon Valley Bank is seized after historic failure.

Twitter search Silicon Valley Bank

@unusual_whales has posted a very interesting thread on some insiders selling stock in $SIVB recently. Coincidence? Maybe it was just that they had a window of time to sell like these executives do and this was nothing unusual afterall. Only time will tell.

Contractors, Closers & Connections of Greenville Event March 16th at Hotel Hartness

March 10, 2023 /
Contractor, Closers & Connections Event – Greenville, SC Jan. 19 2023 – Photo: John Murphy

This is a new networking event that is spreading mostly throughout the South at this point. It’s geared toward those who work in and around commercial real estate, construction and development. If you provide services to any of the aspect of commercial real estate, this really is an enjoyable networking experience.

The organizers have made it by invite only and the cost to attend is $50 plus the roughly 10% clip that Eventbrite takes. They do provide drinks and appetizers and when I went to my first event in January in Greenville, the people who attended were quite friendly and open to conversation.

Contractors, Closers & Connections of Greenville – Southern Hospitality

Maximizing Tax Savings: A Strategy for High-Income Married Couples with Short-Term Rentals

March 9, 2023 /

Here is a strategy I’m seeing for married couples where one spouse has a big W-2 income.

Please consult with your own tax advisor. I cannot give tax advice. I’m only sharing what I’m seeing some other real estate investors do.

Want to take advantage of cost segregation and minimize your taxes but you’re not a full time real estate pro or investor?  Perhaps you’re a doctor, executive, a sales pro who has a big W-2 income who wants to get into real estate investing. Some who fit this category are purchasing STRs (Airbnbs, VRBOs) and managing them themselves. Generally speaking this would require that one’s spouse does the managing and not the person with the big W-2 income.  The IRS categorizes the STRs differently from long term rentals (i.e. single family rentals, duplexes, apartments etc).  The STR is considered an active trade or business. If you meet the IRS criteria as being actively involved in the property, you may be able to utilize the benefits of cost segregation and the large depreciation expense it generates to offset tax liability for the W-2 income. BTW, you don’t have to be making multiple six figures to make this work. This strategy could work for someone making less money. When I see it used, it’s often the big W-2 income earners who are doing this.

I was recently at an event where a CPA explained this strategy to a room full of real estate investors. It was discussed that they might consider converting a rental home to an STR to be able to take advantage of this.

Let’s say you buy an Airbnb for $425,000 – purchase price plus any improvements, furniture etc. The land is worth 20% ($85,000). That is deducted that since land can’t be depreciated which leaves a cost or basis of $340,000 which can be cost segregated. Depending upon the property, the study results would likely show that 20-25% of the $340,000 basis could be accelerated.  That is $70,000 +/- in depreciation expense that could be used to lower you and your spouse’s overall income by $70k. If your tax rate is 32%, that’s over $20,000 in income tax savings. The study might cost $2,500 +/- which is a deduction. This is a 10x return – 1,000% return on your investment. If you were to scale this up to say $1,000,000+ Airbnb, just multiply these tax savings by 2-3x and you can see why people do this.

If you are one of those couples who has a big income and wants to use real estate to help reduce your tax liability but neither of you are a full time real estate pro, then discuss this strategy with your tax advisor. If you fit this description and you have a short-term rental, reach out to me for a no cost, no obligation estimate. You’ll then have solid information to go back to your tax advisor to determine if doing a cost segregation study might end up saving you a small fortune on your income taxes.

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