Husband of 34 years to my college sweetheart, Janet Murphy (@janetmurphydesign on Instagram). Together we have 6 wonderful children from ages 15-31 and 5 grandchildren. I've been a licensed REALTOR since 2003 and broker since 2007. I also am a cost segregation specialist helping building owners and real estate investors maximize their tax deductions, save thousands on their income taxes and increase their cash flow. If you're a building owner you probably haven't done a study...let's connect. There is no obligation. We can run an estimate for you and really every building should be evaluated if the basis is over $150,000. I can work all over the country and not just here in the Upstate. We relocated to Greenville, SC for the lifestyle, lower cost of living, amazing amenities in the area and the growth opportunity for business and real estate. We absolutely love it here!
All opinions are expressly my own and do not represent either eXp Realty LLC, Cost Segregation Services, Inc. or any other company, organization or group that I might be affiliated with.
What kinds of properties are good for cost segregation? I get asked this a lot especially as I introduce the concept of cost segregation to commercial real estate brokers. The fact of the matter is, cost segregation works on any and all properties where the owner is receiving a rent or lease payment. With the firm I represent, we generally add one more qualifier and say that the basis or cost needs to be about $200,000 for it to make sense to study. And the reason for that is the minimum study will cost about $2,000 and if you have a $200,000 building – maybe an SFR – you might see a depreciation expense of $30,000 – $40,000. If you’re at the 24% income tax rate, that’s a tax savings of $7,200 or so. Sometimes we still do studies down to about $150,000 in cost basis and it’s still a benefit for the owner.
Cost segregation works on all kinds of property:
Industrial
Manufacturing
Warehouse
Office Warehouse
Self Storage
Cold Storage
Office
Retail Strip Centers
Strip Malls
Restaurants
Fast Food Restaurants
Auto Repair Shops
Hotels / Motels
Apartment Buildings
Rental property – SFRs, Condos, Townhouses
Short-term rentals – Aibnb, VRBO
Gyms, Athletic and Fitness Centers
Determining if cost segregation is right for you is a fairly straight forward endeavor. You will always want to consult with your tax advisor about your particular situation. It really just becomes a math issue. You get an estimate from me and then discuss with your tax advisor. Does it make economic sense or not. It’s also not as expensive as you might have been led to believe. For most of our clients it is not a big set back and they typically see 10-20x return on the investment with us. That’s 1,000 – 2,000% return on your investment. It’s generally a no-brainer.
Short-term rental ownership exploded during Covid. The business model has been a good one for many investors throughout the country. These property owners can take advantage of cost segregation just like they would if they owned a commercial building or an apartment complex.
Short-term rentals, VRBOs, Airbnbs are considered 39 year property. It’s commercial property like a hotel is commercial property. It’s not 27.5 year property which is what a long-term rental would be such as a single family rental or an apartment building.
Is it worth is to doing cost segregation on an STR? Yes, of course. Where it might not be beneficial is if you just aren’t netting much profit or if you expect to sell your property within the next year or two. But generally, from what I hear, owners will net $25,000 – $50,000 per year.
In a cost segregation study, the property will be reclassified from all of it being 39 year depreciation to 5, 7, 15 and 39 year property giving you a much bigger deduction earlier on in the life of your ownership. Let’s use simple math to make some calculations. Let’s say you own an Airbnb and you have $600,000 all in. The land is about $100,000. That leaves you with $500,000 cost basis. Normally the FF&E is a separate expense from the real estate. In this case we figure you have this as a separate line item of $35,000 and it is not included in the real estate.
When we do a study on a building like this, we will generally see about 15-20% will be reclassified as 5 year class life property. The land improvements which are 15 year class life property will often come in somewhere in the 3-10% range depending upon the property. So for simple math, let’s say we identify 20% between the 5 and 15 year property. 20% of $500,000 is $100,000. You would get a $100,000 deduction against your income in year one or whenever you decide to do the study and apply it. Now in 2023, bonus depreciation has dropped to 80%. (If you own an STR that you placed into service between Sept. 27, 2017 and Dec. 31, 2022, you would qualify for 100% bonus depreciation). So that $100,000 in depreciation generated by our study would have 80% of that applied to reduce your taxes in 2023. Let’s say you net $50,000 in 2023. That’s after all your expenses, debt service and regular straight line depreciation. If you’re at the 32% tax rate, you’d owe the IRS $16,000. If you did cost segregation, you would owe ZERO and would have a loss carry forward that would eliminate most, if not all, of next year’s tax liability. The cost for such a study might be $3-4k. If you have owned the property for at least one tax year, you would need to file a 3115. That will end up costing you about another $1-2k to complete.
So if you own a short-term rental property and are making money, be sure to reach out to get a quote and see how it might work for you.
Why doctors, dentists and lawyers should consider utilizing cost segregation with their real estate investments to save money on their income taxes.
I do a lot of work with doctors, dentists and lawyers when it comes to cost segregation. For nearly all of them, it’s a passive income investment. There are times though when they own the building(s) that they run their operating business out of – i.e. self rental. At that point they often can take advantage of “grouping.”In that case, cost segregation is a grand slam as they can use the depreciation from their real estate to offset their operating business income.It’s massive. Sometimes I run into situations where the doctor, dentist or lawyer or some other high income W-2 earner own a short-term rental like an Airbnb or VRBO and their spouse is running the operation. At that point they might also be able to utilize the depreciation generated from cost segregation to offset their high W-2 income. (BTW, as with all of these things…this is not tax advice. Please consult your own tax advisor regarding these strategies). I will publish information in a future blog post about high W-2 earners owning and operating short-term rentals.
But let’s get back to owning real estate as a passive income investment for these highly compensated professionals. If they own residential real estate investments (rental homes, duplexes, triplexes, quads, apartments etc) or if they own commercial real estate of any kind and IF they earn a profit at the end of the year, they will owe federal income taxes at their marginal rate. More often than not that rate is 32, 35, or 37%.
Let’s say they own a few buildings and when all is said and done, at the end of the year, they have a net profit of $10,000. They expect their investment to grow in future years if not through the purchase of additional units or buildings, then through rent growth. The $10,000 in net profit is after all expenses, debt service and normal straight line depreciation. If they pay taxes at a 35% rate, they would owe the IRS $3,500 for the year. Next year it would likely be more as their net profit grows. A cost segregation study would eliminate this $3,500 tax obligation for the year and would likely wipe out future income tax liabilities on their real estate investments for years to come. How could this be you ask? The magic of increased accumulated depreciation expense / i.e. bonus depreciation or accelerated depreciation creating a large loss carryforward.
Let’s say in the scenario above, one of the properties you own is a $500,000 duplex and the land is worth $100,000 which is not depreciable. So $400,000 is your cost / basis that can be depreciated. A cost segregation study will identify and separate the 5, 15 and 27.5 year property. Often this might be between 20-25% of the building cost or basis. Given that information, you will likely see an $80,000 – $100,000 depreciation expense. If you purchased the building and put it into service between Sept. 27, 2017 and Dec. 31, 2022, it qualifies for 100% bonus depreciation meaning you can take all of that $80-$100k in depreciation in one year. (At this point bonus depreciation starts to phase out – for buildings put into servince in 2023, they will qualify for 80% bonus depreciation…in 2024 it goes to 60% etc). So let’s say it’s $80,000 in depreciation. You had a $10,000 net profit and were going to owe $3,500 to the IRS that year and likely every year going forward. By doing the study, you would not have any taxes owed this year. You’d have a $70,000 loss carry forward which you would utilize in future years. In this scenario, you may have eliminated your tax liability for the next 6-7 years. A cost segregation study for a building like this might cost $3,500 or so. You might also have to file an IRS Change of Accounting Form 3115. (If you’ve owned the property for at least one tax year, you will have to file this form). The 3115 let’s the IRS know you’re going from straight line to accelerated depreciation. We draft those typically for about $750 and your tax advisor would sign off on it.
Let’s review…you have $4,250 into the study and 3115 draft. (You’ll probably have some additional fees from your tax advisor as they have to fill out the 3115 information document so we can draft that form). So maybe your tax advisor is going to charge you another $500. So you’re all in at about $4,750 +/-. That’s a business write off for you so it’s really costing you a net of $3,087.50 roughly. That’s less than what you were originally going to have to pay the IRS when we started. The $80,000 in depreciation expense that you’ll get, ends up saving you about $28,000 in federal income taxes ($80,000 x. .35). That’s a 9 to 1 return or 900% return on your investment. You likely wiped out your tax liability for years to come and you can use that money to reinvest, put in the bank, take a trip etc. It’s your money. You can do with it what you want.
If you’d like to learn more or get a quote for your building, please just reach out and I’d be happy to discuss. We alway recommend you also talk with your tax advisor. Once you get a quote from us, please have your tax professional review it to make sure they are on board and that you can in fact utilize the depreciation expense we generate with cost segregation.
Build it in America Act is making its way through Congress. They are looking to extend 100% bonus depreciation through the end of 2025. Right now the law is that for buildings placed in service in 2023, the owner can take 80% bonus depreciation and then it’s slated to drop by 20 points each year until it’s zeroed out in 2027. This new bill allows for 100% bonus depreciation for ‘23, ‘24 and ‘25. No word what happens in 2026. I kind of figured they might extend this given the slowdown we are seeing in commercial real estate.
American Enterprise Institute has some details on what may be in the Build it in America Act which is dealing with tax reform to try to encourage more growth.
If you’d like a quote for cost segregation, I work all over the U.S. in all 50 states and represent Cost Segregation Services, Inc. We’ve successfully completed more than 40,000 engineering-based cost segregation studies over the past 20 years. We’ve studied all building types and classes in all 50 states. Give me a call at 864-276-1448
Photo credit – Hotel Excelsior – Banker’s Suite on 2nd Level Above Alerus in downtown Excelsior, MN
We are working on a very cool and quite complicated but exciting project in Excelsior, MN. I also learned something new that I thought I’d share. And for the record, this study has not quite started yet. When we get this one done, I’ll have to come back and provide and update to see if it worked out as we think it might.
The picture above is now the newly remodeled short-term rental that sits over top the Alerus space in downtown Excelsior, MN which has also been completed renovated. Here a photo from the street out front so you can see that it’s commercial on the main level and residential or STR now above.
This is an existing building that has been in-service for many years. The owners purchased it a couple of years ago. The upstairs was a long term rental apartment. The main level has been and continues to be commercial use. The owners have spent a significant sum of money converting the long term apartement into a short term rental (aka Airbnb). I was wondering if perhaps the improvements to convert the LTR to an STR might be considered QIP (Qualified Improvement Property). QIP gets 15 year class life and would get 80% bonus depreciation in 2023. QIP is only for commercial property. STRs are considered commercial property – 39 year class life instead of 27.5 for LTRs. To get classified as QIP is a big swing in favor of of the building owner if this turns out to be the case.
We believe this will qualify as QIP because the building was in-service and the building would have had to have had 80% of the revenue coming in from the residential rental part of the building in order for this NOT to be classified as QIP. I was not aware of that little rule. It looks like it will be good news for these owners. (Note if you have a new mixed-use building like this that has not been put into service yet and you have commercial on the main and an STR above it would not quaify for QIP. The building has to have been put into service at some point to qualify as QIP).
If you have a mixed use building like this one where you have retail on the bottom and you want to convert long term rental space above it to a short term rental, we should talk about how cost segregation might be of help. In fact you might not even need us to do the analysis but many CPAs and tax pros will still have us do the calculations and reclassifications so that everything is done correctly, buttoned up and is ready to be met with scrutiny if needed. I’m here to help – anywhere in the U.S. 864-276-1448
People pass away every day…in the media we hear brief commentaries about certain sports figures or hollywood types who’ve died, but yesterday news broke that the legendary Sam Zell passed away at 81 years old. The Chicago Sun-Times has a good article on Sam Zell. He seemed to live life to the fullest and he added tremendous “color” to an industry that is pretty staid. Zell was not afraid to speak his mind…to go against the current thinking and to make very big bets on real estate and business. He didn’t always make a killing and in fact sometimes failed very publicly as in the case when he purchased the Chicago Tribune which eventually went into bankruptcy.
Over the years I would have CNBC on in the background from time to time and any time I heard that they were going to have an interview with Sam Zell, I made sure to tune in. It wasn’t necessarily because I was interested in commercial real estate – I was involved in residential real estate at the time – but he offered such a fresh perspective that often was not seen or hear on broadcast TV. He didn’t just talk about commercial real estate but had a much bigger perspective on lots of other aspects of the economy, trade, business and politics. He rarely disappointed in my mind.
There has been lots of discussion and articles written about the rising costs that are starting to hammer commercial property owners but particularly multi-family owners in parts of the country. Rising operating expenses and slower rent growth are squeezing the returns many of these investors and operators had been accustomed to over the past few years. Huge jumps in insurance costs particularly in Florida, Texas and along the East Coast have investors crying for help. In Texas, they have an additional problem with sky high property taxes.
Everyone always thinks Texas is a low tax or no tax state but that’s for personal state income tax. There isn’t any. But the government has to operate somehow and a big part of their funding comes from property taxes. Residential taxes are high as well as commercial and multi-family. Here’s a helpful article on commercial property taxes in Texas.
Owners are trying to squeeze what they can out of these properties. If they have not done cost segregation yet, that might be something that they should at least evaluate. There may be some significant tax savings sitting there for them that could help them with their cash flow or just help build up their rainy day fund. We typically see that owners will save between $30,000 – $70,000 per $1 million in building cost or basis. So if they have a $10 million multi-family building, that tax savings might be $300,000 – $700,000 +/-. The cost of the study is but a small fraction of that. If you’d like to know more, don’t hesitate to reach out. We offer a no cost, no obligation quote to see how cost segregation might help you as a building owner.
Now that we are well beyond the difficulties of the Covid-19 pandemic, hotel brands are once again starting to push on the hotel owners to make improvements to their buildings. Are the PIPs (property improvement plans) still in place? Since many hotels didn’t have many customers for a while during the long duration of the pandemic, their furnishings as well as other items such as carpets and bathrooms may not have seen the wear and tear that they would have. Consequently, plans to change those out have been pushed out. But the time is soon coming to make those improvements.
This is also a reminder that when hotels are doing these renovations that they should also be looking at doing a partial asset disposition study (PAD). These are done when the renovations are more than $100,000 which nearly every renovation of a hotel will certainly hit. Partial asset disposition allows for the owner to take a tax deduction in the year in which the renovation was done. It’s a use it or lose it tax deduction. Since you are putting new material into your building and throwing out the old, we do the calculations as to what you are throwing out. There is basis that is still on your books and with our study, you can deduct that off your books since you’ve removed it from the building. Not only do you get a tax deduction but since it’s off your books, you don’t have to pay recapture tax on it when you go to sell the building.
Every project varies depending upon the kind of work done and how long you’ve own the building, but it’s reasonable to expect that you might see a tax deduction of 15-20% of the improvement amount. So for example, let’s stay you are planning a $500,000 improvement. By studying that work effort and doing a partial asset disposition, PAD, you might see a $75,000 – $100,000 +/- deduction that year on your taxes. If you are paying 32% Federal tax rate, that’s $24,000 – $32,000 in tax savings. These studies tend not to cost much. If you have already done a cost segregation study on your building then this might only cost you another $3,000 – $5,000 to do. That cost is an expense of course. If you need to do cost segregation, that will increase the overall cost for as you’ll have to do a cost segregation study but a cost seg study will likely yield another massive tax deduction for you in addition to what is noted above.
If you own a hotel and you are planning to do renovations and would like to discuss, please give me a call. If you did renovations in 2022 and have filed an extended tax return, there is still time to do a partial asset disposition and take advantage of this great tax deduction. Once you’ve filed your taxes for the year in which the work was done, you cannot amend to go back and take this deduction. It truly is use it or lose it. Most lose it because they are not aware of this. I work all over the U.S. and can help you on a project anywhere in all 50 states in the U.S. John Murphy 864-276-1448.
Renderings by Johnston Design Group and SeamonWhiteside – Upstate Business Journal
The area in and around Bon Secours Wellness Arena has been lacking for years. Now there are a couple of projects that are in the works that will transform the area into an entertainment destination and will be a great complement to Bon Secours.
Miami-based NR Investments looked at the difficult to development triangle location of the former Greenville Memorial Auditorium site. This is not an easy project. What they are proposing looks terrific and I believe will be a great addition to Greenville, SC and will help revitalize this area.
The project has not been fully approved yet. The Design Review Board has asked for a few changes and pushed this out to the June timeframe. It seems like this will get approved once those accommodations have been made.
Below is a short video from the NR Investments partner discussing the site.
Post pandemic changes continue to take root in the commercial real estate space and especially with restaurants. It was inevitable that given the scare the American people were put through with the Covid hysteria that we’d see an increase in drive-thrus and pick up windows. Pick up windows have long been a thing in beach towns and resorts but they are now making their way to every day suburban America.
Smashburger is testing out virtual lanes whereby they create some space in their stores to cut out a pick up window. Customers place their orders on their app and pay for it electronically. They then just walk up and pick up their order. Panera does a lot of this as do other restaurants, but you have to go into their stores to get the food. That’s fine now, but for those looking to shave 30 seconds off their lives, they may like the pick up windows. This allows Smashburger to provide some additional convenience for customers without needing the real estate to double or triple their drive-thrus which of course also costs a significant amount of money.
