Should you do cost segregation on tenant improvements? Most tax advisors and CPAs don’t bother. They just call it QIP (qualified improvement property) which gets a 15 year class life. If it’s 80% bonus as it was in 2023, they just claim 80% in year 1. If it’s in 2024, then it’s 60% and they take 60% bonus in year 1. But did you know that more often then not, the owner of those tenant improvements is paying more money in taxes than they need to be?
If you consider that with a lot of improvements, the 5 year class life will be 25 – 45% of the overall improvement, then it means there’s still more to squeeze out. Consider this scenario…$400,000 tenant improvement. Let’s say that 35% of that would get identified as 5 year class life. If it goes into service in 2024, the tax advisor or CPA is going to take 60% of $400,000 or $240,000 in year one for the deduction. However, $160,000 in depreciation remains and that will be deducted over the next 14 years. But in that $160,000, we said 35% is 5 year class life. 35% of $160,000 is $56,000. So you might now have $56,000 that you could have taken over the next 4 years now lumped together with the 15 year QIP and it gets spread out over 14 more years. For those keeping track, a $56,000 tax deduction at a 32% tax rate is about $18,000 in taxes. So in other words, you are paying $18,000 to the IRS that could have stayed in your bank account over the next 4 years. Yes, there will be those who say it all works out at the end of the day so why am I bringing this up? Sure, it works out over 15 years but you miss out on the opportunity to keep more of your money working now than bleeding it out over 15 years.
If you made improvements north of about $200,000 in 2024, those should be studied. You should at least have it evaluated. Some of those improvements will be able to take partial asset disposition (PAD). That’s a use it or lose it tax strategy. Pretty much most owners miss out on this deduction. They miss out be they are not engaging nor are their tax advisors and CPAs with cost segregation professionals with every single improvement over $200,000. If I had to guess, I would think that somewhere between 97-98% of all improvements over $200,000 are not studied. And they should be.
If you’re okay paying the IRS $5, $10, $15, $20k more than you need to be, no problem. But if you want to squeeze everything out of your building and improvements that you are lawfully allowed to do, then have me run your project through this calculator to see. Every building owner I talk with tells me that they don’t want to pay any more in taxes than they absolutely have to. So why then are you paying more in taxes than you have to? I also hear a lot of building owners that the wish they got more tax strategy from their tax advisor. Okay, tax advisors, here’s a fantastic, easy, cost-effective and inexpensive way to be strategic for your clients.
Got Tenant Improvements? Let’s run them through my model and see what it spits out.
I’ve built a custom calculator to help figure out if it’s worth it or not to do cost segregation on improvements. It’s very details and gives you some tolerances and ranges so you can see if it’s worth it or not. I’ve played around with it and I can tell you that nearly all these capital improvements, tenant improvements, renovations etc. can benefit from cost segregation.
Below is a brief video I recorded demonstrating this calculator. All CPAs, EAs, and tax advisors should run their client’s projects through this model.
Connect with me on LinkedIn or give me a call. My contact information is below. I’d be happy to discuss your project anywhere in the U.S. I can run your project throught this Tenant Improvements calculator and see what kind of results we might expect. Let’s maximize your tax savings on your building, project, improvements.
REALTORS and Brokers who work with real estate investors should look at adding cost segregation as a service that you and/or your firm offers. It’s a fantastic service for your clients. (Here’s a 12 minute explanation how REALTORS can implement cost segregation into their business today). You’re going to make a lot more in referral fees from cost segregation than you do with your affiliated services for home warranties or insurance. You can earn 10% of the fee. If the study costs $2,500, that’s $250 for you just for referring us. You don’t have to be an expert. Let us handle it. We’ll run with it and pay you when the study is finished and we’ve been paid by the client.
Connect with me and let’s discuss. I work all over the county. I’m also a licensed REALTOR and have been since 2003. I’ve been a broker since 2007. I don’t do much for transactions any longer as my time and commitment is with cost segregation. So I’m here to be your partner. I know how hard you work and the value you try to deliver to your clients. This can and will help.
If you thought building and investing in the affordable housing space was lucrative before, it’s about to go to a whole ‘nother level with this proposed legislation.
The private sector apparently can’t get the job done but the government thinks that if it can print $30 billion that we don’t have, that they can make things better for people.
We all know how this works, right? This will be a big government give-away to friends of the government. Time to replenish the housing stock in Baltimore, Detroit, DC, Chicago, LA etc.
This is a fantastic explanation of Cap Rates by Ron Oxtal, MAI, Tropical Valuation Advisory, Tampa, FL. There are many variables and just because the Federal Reserve lowered interest rates by 50 basis points last week, don’t expect Cap Rates to move for commercial real estate.
Here’s the link to the Globest article referenced in the LinkedIn post above.
In the competitive world of commercial real estate (CRE), every advantage counts. As a broker or agent, your goal is not just to help your clients close deals, but to add value that sets you apart from the rest. One underutilized strategy that can enhance client relationships, generate referral fees, and potentially lead to future transactions is cost segregation. This tax-saving tool can transform how your clients view property investments and open the door to significant financial benefits for both of you.
What Is Cost Segregation?
Cost segregation is a tax strategy that allows property owners to accelerate depreciation on specific building components, such as lighting, flooring, or specialized wiring, rather than depreciating the entire property over 39 years. By reclassifying certain assets into shorter depreciation schedules (5, 7, or 15 years), property owners can dramatically increase their tax deductions, often realizing significant tax savings in the first few years of ownership.
These upfront savings enhance cash flow and enable property owners to reinvest in their business or even expand their property portfolio. Given these benefits, cost segregation should be a standard part of your conversation with clients, particularly for those who own or are considering purchasing commercial real estate.
Why CRE Brokers Should Offer Cost Segregation
1. Value-Added Service for Your Clients
Offering cost segregation positions you as more than just a broker; it positions you as a strategic partner invested in your clients’ long-term success. The tax savings that clients can achieve through this strategy are substantial—sometimes as much as 20% to 40% of a property’s purchase price can be reclassified for accelerated depreciation. This kind of savings can lead to increased cash flow, allowing your clients to reinvest in their business, upgrade facilities, or even acquire additional properties.
2. Strengthen Client Relationships
Cost segregation creates an opportunity for brokers to strengthen client relationships by providing a service that has tangible financial benefits. When clients see that you’re proactively looking for ways to save them money, they’re more likely to return to you for future transactions. More importantly, when the savings from cost segregation enable a client to purchase another building, who are they likely to call? The same broker who introduced them to the strategy in the first place.
3. Earn Referral Fees
Not only can offering cost segregation be a value-added service for your clients, but it can also be a direct revenue generator for you. Many brokers are unaware that they can earn a referral fee for recommending a cost segregation study. This additional stream of income can be a nice bonus, especially when paired with the potential for repeat business as clients reinvest their savings into new properties. Also think about this…why leave an opening for your competition to eventually reach out to your customer / client and talk with them about cost segregation. They might wonder why you didn’t say anything about it.
4. Make Clients’ Properties More Attractive to Buyers
For brokers involved in sales transactions, presenting cost segregation as part of the package can make a property more attractive to potential buyers. When buyers understand that they can benefit from accelerated depreciation after purchasing a property, it can make the financial proposition of the deal much more enticing. In essence, you’re not just selling a building; you’re selling a future tax strategy that can significantly boost the buyer’s return on investment. My experience is that about 6 out of 10 building owners have never heard of this before. Many of their CPAs won’t make mention of it either. You should make sure all your clients and prospects know about it.
5. Staying Ahead of the Competition
The commercial real estate market is becoming more competitive, with brokers and agents vying for the attention of property owners and investors. Offering services like cost segregation distinguishes you from the competition by positioning you as a full-service consultant who can bring more to the table than just listings and negotiation skills. This depth of service helps to solidify your expertise in the eyes of clients, giving you an edge in a crowded marketplace. Consider marketing cost segregation as a service you offer – because you do! You just have to offer it!
Cost Segregation and the 2017 Tax Cuts and Jobs Act
The benefits of cost segregation certainly accelerated and became even more attractive since the 2017 Tax Cuts and Jobs Act (TCJA). One of the key provisions is bonus depreciation, which allows property owners to deduct 100% of qualified improvement costs in the year the property is placed in service. The TCJA has a stair step downward each year or bonus deprecation. For properties placed into service after Sept. 27, 2017 and by Dec. 31, 2022, they could take 100% bonus depreciation. (They still can with a lookback study…so if they haven’t done cost segregation, they can still do so). In 2023, bonus went to 80%. In 2024 it’s 60% and it lowers 20% each year until it is zero again in 2027. Congress may vote to extend bonus depreciation but given the way things are in Washington, DC, no one really knows if this is going to happen. Brokers should highlight the current bonus depreciation ability window to clients, stressing that now is the time to act to maximize tax savings.
Practical Steps for Brokers
If you’re a commercial real estate broker interested in offering cost segregation, here are a few steps to get started:
Partner with a Reputable Cost Segregation Firm: Not all cost segregation studies are created equal. Partnering with a firm that employs engineers and tax professionals ensures that your clients will receive a comprehensive and accurate study. Find a great rep who will be professional and responsive to you and your clients.
Educate Your Clients: Many property owners may not be familiar with cost segregation or may not realize it applies to their properties. Take the time to explain the potential benefits and how it could impact their bottom line. This is where your cost segregation partner can come in handy to help with the education. You don’t need to be the expert.
Highlight Potential Savings Early: When discussing potential purchases with clients, make it a habit to mention cost segregation. Highlighting the tax advantages upfront can make the financials of a deal more appealing to buyers. Some brokers also use cost segregation estimates to help them with their listing marketing.
Leverage Success Stories: Share testimonials or case studies from other clients who have benefited from cost segregation. This provides real-world examples of how the strategy can boost cash flow and open doors for further investments. Once you have an owner or two who saves $50, $100, $200k on their income taxes, you’ll become a true believer yourself.
Don’t Forget About Your Own Investments
Remember if you own commercial property or residential investment property, cost segregation can be a huge help to commercial real estate brokers. Discuss this with your own tax advisor, but normally you qualify for as a Real Estate Professional or REP, in the tax code. This means that all of your income is active so if you have real estate and can generate say a $200,000 depreciation expense, that very well might lower your income that year by $200,000 saving you probably $60,000 – $70,000 in income taxes. Might it be worth it for you to spent $4-$7k or so on a cost segregation study? I think so.
Conclusion
In today’s fast-paced commercial real estate environment, brokers need every tool in their arsenal to add value, build strong relationships, and stay ahead of the competition. Cost segregation is one such tool—a tax-saving strategy that not only benefits your clients but can also enhance your business by generating referral fees and encouraging repeat transactions. By offering this service, you position yourself as a forward-thinking, value-driven broker who is committed to maximizing your clients’ financial success.
Now is the time to unlock the hidden value in your clients’ properties and take your real estate practice to the next level. As I like to say, we help squeeze everything out of that property. There’s often money still remaining in many buildings and owners and brokers just are not aware. Let us take a look and see if we can help. There’s never a cost or obiligation to have us run the numbers.
I work all over the U.S. and would be happy to have a conversation with you. I partner with CRE brokers around the country to help them offer this service. I’m backed by a phenomenal company in CSSI. It still blows my mind how few commercial real estate brokers utilize cost segregation as part of their core services offered.
Sources: Roddy’s Foreclosure Listing Service and The Real Deal
We’ve been hearing a lot about the financial stress and loan failures in the commercial real estate world for the past couple of years. It does seem to be accelerating and spreading. Now there are signs that the much vaunted multi-family asset class is showing signs of increasing distress.
Multi-family distress reached 5.71% reaching a nearly 9 year high according to GlobeSt. This is still better than the 11.91% distress in Office according to CRE Daily on multi-family distress.
We’re likely at the start of a three-year cycle of increasing multifamily distress,” Silverman told GlobeSt.com, explaining that many property owners who took advantage of favorable lending conditions between 2013 and 2017 are now struggling.
Mark Silverman, partner at Locke Lord, CRE Daily Article
If you have not been to a Buc-ee’s, they are quite the American experience. I remember the first time walking into the actual store itself, I thought I had walked into a major sporting event. It was loud and energic! I loved it and my sons did too!
Here’s an excellent post from Chris Koerner with the locations of future Buc-ee’s. no doubt his assumptions are right about those who invest in and around these giant C-stores. These impact both residential investment properties as well as commercial properties.
If you’ve been to South Carolina, you know how much the people LOVE QuikTrip! They are awesome gas stations and convenience stores and they are all over the place here in the Upstate.
This QuikTrip in Piedmont just sold according to the GSA Report. It’s located at 2085 Highway 86, Piedmont. Terms of the deal were not disclosed. The property sits on 3.19 acres and was built in 2019. If I see the sale hit the tax record, I’ll update this post with the sale information, but for now, nothing is showing up. It must be a very recent sale.
According to the article in GSA Report, “Timothy Nichols, Sean Sharko and Austin Weisenbeck, investment specialists in Marcus & Millichap’s Chicago Oak Brook office, had the exclusive listing to market the property on behalf of the seller, a South Carolina limited liability company, and procured the buyer, a Phoenix, Ariz.-based limited liability company, the release stated. Ben Yelm, broker of record in South Carolina, assisted in closing the transaction.”
Tunnel Car Washes and Cost Segregation – What you need to know about 60% bonus depreciation.
If you purchased a tunnel car wash in 2024, you’re going to want to cost segregate it. Back in 2022 when bonus depreciation was 100% many CPAs just marked it all as land improvement and took 100%. I get that. In 2023, the same thing happened but it was 80% bonus. Now in 2024, bonus is 60%. You are leaving money on the table if you don’t do cost segregation. In many cases it’s $300,000 – $500,000 you’re leaving on the table by not doing cost segregation.
I’ve had a custom tool built to specifically calculate and show you the year by year tax savings you’ll get from doing cost segregation vs. not doing cost segregation and just letting your CPA mark your depreciation schedule as all 15 year class life and taking 60%. Take a few minutes and learn as I try to demo this new calculator. If you have a property and would like me to run the numbers, let me know. Check out the 4 minute video explanation below.
Everyone who buys a tunnel car wash in 2024 and who has basis, should do a cost segregation study. Of course consult with your own tax advisor, but get armed first with the information. I think I’m the only one that I know of that has this tool to calculate this for you. If you purchased your car wash with all 1031 exchange funds then there’s no basis. If you purchased it partially with 1031 funds and have new debt / money, there may be enough basis to study. Let me run the numbers. I work all over the country.
If you aren’t doing cost segregation on a 2024 Tunnel Car Wash you may be leaving $100k on the table.
