Cost Seg Building

A Blog About Tax Savings for Building Owners

Category: Partial Asset Disposition

Unlocking Tax Savings: How Commercial Property Owners Can Benefit from Partial Asset Disposition During Renovations

May 8, 2024 / / 0 Comments


Partial Asset Disposition (PAD) is a tax strategy that can be highly beneficial for commercial property owners, especially during renovations or upgrades. Essentially, PAD allows property owners to decrease their taxable income by writing down the depreciable basis of certain assets that are removed and disposed of during property renovations.

When a commercial property undergoes renovations, certain existing assets may need to be removed—anything from lighting fixtures and HVAC units to doors, windows, and even structural elements like roofing. Under PAD, the cost of these removed items, including the expenses associated with their removal and disposal, can be written down. This write-down provides an immediate tax deduction for the property owner in the year the renovation occurs. It’s crucial to note that this is a time-sensitive opportunity: if the write-down is not applied in the tax year during which the renovation happens, the chance for that deduction is permanently lost. It’s a use it or lose it tax deduction.

The benefits of implementing PAD extend beyond immediate tax relief. At the time of sale of the property, PAD can lead to permanent tax savings by reducing the overall basis of the building, thereby decreasing recapture tax on property that is no longer part of the property.

This strategy is particularly relevant for a range of commercial property owners, including:

  • Retail lessors who might acquire assets left behind by tenants.
  • Property owners undertaking significant renovations, repairs, or improvements in areas such as roofing, lighting, parking lot resurfacing, door and window replacement, floor resurfacing, and both interior and exterior painting, where costs exceed $50,000.
  • Owners who have demolished parts of a facility as part of an improvement or renovation project with costs over $50,000.
  • Those who have acquired, constructed, or expanded facilities since 2000.
  • Businesses that have recently upgraded or replaced major operational equipment within the tax year.
  • Pass-through entities that may be considering a sale soon, especially if there has been significant appreciation in the value of their facilities or operational assets.

The IRS’s final tangible property regulations under Section 263(a) offer comprehensive guidelines on how these assets should be handled for tax purposes. Tax professionals are encouraged to guide their clients in making an annual election to claim these deductions, ensuring that they do not miss out on substantial tax benefits.

To accurately assess and claim these deductions, conducting an engineering-based cost study is advisable. This approach provides tax professionals with precise, defendable calculations that can be directly applied to a client’s tax returns, maximizing the potential benefits of PAD. This detailed evaluation not only supports the claim but also ensures compliance with tax laws, making the deduction process smooth and justified. As always, be sure to consult with your own tax advisor.

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.

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

Chick-Fil-A Woodlawn Road Charlotte Proposes 3 Lane Wide Drive-thru to Help Traffic Back Up – Partial Asset Disposition Opportunity

January 17, 2023 /
Image: Google Street View of 1540 E Woodlawn Road, Charlotte, NC – Chick-Fil-A Restaurant

It’s a common issue many of us have seen whereever there is a Chick-Fil-A…cars backed up into the main roadway as they wait in line to place their order for food. Chick-Fil-A has really mastered the art of the drive-thru and during and after Covid, they were the first that I saw that doubled up their drive-thrus expanding capacity. McDonalds had kind of done that over the past few years but CFA had taken it to an entire new level.

Now they are looking at going 3 wide instead of 2 wide in their drive-thru lanes. This is an attempt to deal with the complaints of traffic being backed up along Woodlawn Road in Charlotte during meal time. Chick-Fil-A is proposing that they go full on drive-thru only operation and eliminate dining to only have room for 3 drive-thru lanes and keep more traffic on their property rather than spilling out onto Woodlawn. According to the article in Axios Charlotte, this has caused a conundrum for city planners and council because they want a community that is more walkable and less dependent upon the automobile. In this case, in order to possibly improve the situation of the traffic congestion, it only ends up making the business more dependent upon the automobile. That said though, I think the public has spoken regarding Chick-Fil-A and in most cases, people just can’t get enough of it and because CFA does such an awesome job with their service via the drive-thru that people continue to frequent their stores and opt to get their food that way.

Since this blog is about cost segregation, this project will be an exellent opportunity for partial asset disposition (PAD). Because part of the building will be removed, we would calculate what that value is and what the remaining basis is on the books and get that removed from the books. It’s an immediate tax deduction in the year in which the work was done and then that amount is also removed off the depreciation schedule for the building so the owner doesn’t have to worry about paying recapture tax on that property that is no longer part of the building. It’s kind of a double tax savings but it’s a use it or lose it tax benefit. A partial asset disposition must be taken in the tax year in which the work was done. If you don’t file it in that same tax year, you cannot amend your tax returns to claim the deduction.

The company that appears to own this Chick-Fil-A at 1540 E Woodlawn Road, Charlotte, NC looks to be Charter Venture LLC. I don’t know if they are considering doing a PAD or not.

Building Owners – Did You Do a Signifant Renovation in 2022?

December 12, 2022 /

Just a reminder for building owners and their tax professionals out there…we are the outsourced provider for hundreds of tax professionals and firms who need to get cost segregation done for their clients. We can help with partial asset dispositions on large ($100k+) renovations as well as capitalization to expense reversals. If you have clients who have buildings and if they haven’t done a cost seg study, reach out and let’s talk. We can usually make it work for a client down to about $200,000 in depreciable building cost / basis. We are still 5-6 weeks away from our deadlines to hit tax deadlines of 3/15 and 4/18/23…that time will go fast. Let’s get them scheduled.

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