Cost Seg Building

A Blog About Tax Savings for Building Owners

Author: John Murphy (Page 14 of 16)

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.

Maximizing Tax Savings and Balancing Hotel Renovations: Strategies for Property Owners and Tax Professionals

April 12, 2023 /
Hotel renovations - property improvement plans. Brands push hotel owners to make renovations to their properties. Partial asset disposition is an excellent tax savings strategy for hotel owners making renovations and improvements.

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.

With all the new hotels that continue to be built, having a hotel that looks dated both in terms of the interior finishes as well as the furnishings is going to be a detriment to business success. Hotel News Now has an excellent article on the ongoing PIP discussions hotel owners are having with the brands they represent.

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.

#hotels #hospitality #hotelindustry #hotelbrands #propertyimprovementplans #PIP #PAD #partialassetdisposition #taxsavings #depreciation #costsegregation #depreciationschedules #enrolledagents #CPAs #taxprofessionals #taxadvisors #johnmuphy #johmurphycostsegregation #costsegregationservices

John Murphy Cost Segregation Services, Inc. "Unlocking enefits: Why Property and Casualty Insurance Agents Should Offer Cost Segregation to Clients"

NR Investments of Miami to Revitalize Greenville with Gateway Project Near Bon Secours: Abandoned Memorial Auditorium Site to Undergo Redevelopment

April 10, 2023 /
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.

Smashburger Experiments with Virtual Drive-thru Lanes…aka Pick Up Windows

April 10, 2023 /
Smashburger
Photo: Smashburger / QSR Magaine

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.

Cost Segregation for Starbucks Buildings

April 8, 2023 /

Recently I received a call from someone inquiring as to whether or not Starbucks were good for cost segregation. Yes, they are excellent for cost segregation because they typically have large parking lots (15 year land improvements) and excellent interior finishing which a lot of that ends up being identified as 5 year class life property.

Here’s a good example. Let’s say this Starbucks was purchased for $2.5 million and the land was worth $500,000. Since the land cannot be depreciated, that must be deducted so we come up with a basis of $2,000,000 for the building. Every building is different but for the sake of understanding how cost segregation can help an owner of a Starbucks building let’s look at how this breaks down.

A cost segregation study is going to identify and reclassify all the building components as well as segregate the land improvements. So with this property, let’s stay 17% was identified at 5 year class life property. That would be $340,000. And for the land improvements, let’s say those come in at 20% which would be $400,000. So on a $2 million building, this owner could accelerated $740,000 or 37% of the building cost or basis. Depending upon the year in which this went into service, it could be taken as 100% bonus depreciation (Sept. 27, 2017 – Dec. 31, 2022). If the building went into service in 2023 then it would qualify for 80% bonus depreciation. (Bonus depreciation drops 20% each year until 2027 when it goes to zero or just regular accelerated depreciation).

If the owner is paying federal taxes at say a 35% rate, that would be a tax savings of almost $260,000 in income taxes. These studies would typically cost less than $6,000 which is an expense…so it’s a net of $3,900. That’s an ROI of about 66:1.

If you’d like to have us evaluate your property for cost segregation, please feel free to reach out and I’d be happy to discuss.

John Murphy Cost Segregation Services, Inc. "Unlocking enefits: Why Property and Casualty Insurance Agents Should Offer Cost Segregation to Clients"

Maximizing Your Tax Savings: A Cost Segregation Case Study on a Retail Strip Center

April 4, 2023 /

Recently we completed a cost segregation study for the owner of this retail strip center.  I thought it might be helpful for you to see the kinds of results with this kind of asset. (Please note that every building is different and will see a different result…some will perform better than others depending on items like finishings and land improvements like parking lots and landscaping). The owner acquired the building in April 2022. For cost segregation, we deduct the value of the land to come up with the basis or the cost of the building. The basis was $1,125,000.  The owner had also spent $125,000 on tenant improvements (TI) which were all interior improvements.  Because he had purchased the building in April 2022, he would have had a depreciation expense of $18,750. That is straight line depreciation at 39 years. He also could have taken the $125,000 as a depreciation expense without our help as those tenant improvements are considered Qualified Improvement Property (QIP) which has a 15 year class life. Remember in 2022, we had 100% bonus depreciation for any class life under 20 years so the TI’s could be take at 100% depreciation expense. So he could have potentially had a total depreciation expense in 2022 of $143,750.  But he ended up with a significantly larger depreciation expense since he did a cost segregation study.  The results were as follows:

Basis: $1,125,000

5 Year: $62,247.71  /  5.5%

15 Year: $124,021.77 / 11.0%

39 Year: $938,730.52 / 83.5%

In 2022, any class life under 20 years can be taken as 100% bonus depreciation meaning you can depreciate the entire asset in year one rather than waiting 5 or 15 years.  (Starting in 2023, bonus depreciation goes to 80% and then drops 20% each of the following years until it’s zeroed out in 2027 unless Congress changes the law). In this owner’s case, he was able to accelerate or fully depreciate $186,269.48 in year one because of the cost segregation. That combined with the QIP provides a depreciation expense of $311,555.14 in year one.  At a 32% tax rate this would equate to a potential tax savings of $100,000. A study like this generally costs less than $5,500-$6,000. It takes 6-8 weeks to complete and the owner and his/her CPA get a complete breakdown in an easy to use format to apply to the owner’ taxes.

Below is the cost detail on this retail strip center.

Be sure to come back again to my blog at www.costsegbuilding.com and follow me on Twitter @costsegbuilding or connect with me on LinkedIn.

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.

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