Everyone thinks about buildings when they think about depreciation and the benefits of cost segregation, but don’t forget about the massive positive impact land improvements can on your depreciation. It’s common that land improvements might be anywhere from 4-15% of your overall building cost or basis. Sometimes we’ll even see 25%+! With 100% bonus depreciation, let’s say you have a $1 million building….if 10% of the building cost is land improvements, you could potentially take a $100,000 deduction in year one of your ownership! That right there would be about a $30,000+ tax savings – i.e. the money stays in your bank account and not the IRS’s.
The IRS classifies land improvements as 15 year class life property. Depending upon the type of property, we will regularly see such land improvements as:
- Parking lot / driveway
- Parking lot striping and barriers
- Sidewalks, patios and curbs
- Site drainage
- Exterior signage
- Landscaping and irrigation
- Retaining walls
- Security light poles
- Exterior fencing
- Exterior dining enclosure
- Exterior bollards
- Dumpster enclosure
- Pool
- Docks
Site improvements can have a BIG impact on your depreciation and provide a big depreciation expense for building owners when they apply a cost segregation study. Remember the cost segregation study will separate out your property from it all being lumped together as either 39 year (commercial) or 27.5 year (residential investment). Property will be reclassified to 5, 7, 15, and 27.5 / 39 year property. Right now for properties purchased / in-service as of Sept. 28, 2017 – December 31, 2022 can take 100% bonus depreciation. Bonus depreciation is available for property with class lives of less than 20 years…so all your 5, 7 and 15 year property could be depreciated in year 1 of your ownership. That can provide a significant tax savings for owners. Depending upon the building, you might be able to immediately depreciate 10-30% of the overall building cost or basis.
For those who want to grind harder on the topic, here’s the official link to the IRS on how to depreciation property. It’s a comprehensive list on all types of property and class lives. Otherwise, if you’d like to talk with me about seeing if your property might be a good fit for cost segregation, please don’t hesitate to reach out. My information is available under the Contact tab above or connect with me on LinkedIn.
As always, please consult with your own tax advisor for your specific situation to see if a cost segregation study might be beneficial to you.