Here’s an example of how a developer who is building a $30,000,000 multi-family property can defer $1,000,000 in income taxes over the first 5 years by utilizing Green Zip Tape rather than standard sheetrock tape. The video below is 3 minutes long. Green Zip Tape works on projects $10 million or more.
Green Zip Tape leverages financial incentives to build sustainably and drive positive environmental change and will revolutionize the way you manage your real estate construction portfolio.
Tax Savings: 5-10% of your construction costs move from 27.5 or 39 year class life to 5 year class life allowing for faster depreciation
Environmental Impact: Eligible for up to 25 LEED Credits (17 direct, 8 indirect)
IRS-Approved Asset Reclassification: The only tape approved by the IRS to convert interior non-load bearing walls into 5-year depreciable assets. Allows for potential wall relocation and drywall reuse.
Improved Remodeling Process: Enables quieter, quicker, and cleaner demolition, remodels, repairs, and retrofits
Explaining Green Zip Tape and how it can help building owners and developers defer more taxes
Industrial Outside Storage or IOS, is a class of property that has become increasingly popular especially in areas where there is a high concentration of warehouses, trucking and supply chain operations. Generally speaking this is a parcel of land where truck trailers are parked.
These IOS’s generally consist of fencing all around the property and then some kind of parking pad – often gravel of sorts. Nearly all of the improvements are land improvements. There will be a small part of it likely identified as utilities which are 39 year class life.
*Let’s say you buy a 5 acre parcel that already is an IOS and you paid $700,000 for it. Maybe you have a land value of $350,000. The remain $350,000 can be studied in a cost segregation study and get that identified properly. That’s not an expensive study. It might cost about $3,000. It’s likely you’ll end up with 90+% that gets identified as 15 year class life because they are land improvements. In 2023, you can take 80% of that in depreciation right away given the bonus depreciation rules.
If you have a property like this, reach out and we can run the numbers for you.
We have an upcoming free course for CPAs to earn continuing education credit (1.5 hours of CPE) but this will also be a helpful webinar for commercial real estate brokers, commercial bankers and of course, building owners. Commercial building owners should know this information. If you are a residential real estate investor or owner of short-term rentals, this will also be a helpful course.
Prepare for a comprehensive exploration of the intricate world of cost segregation and gain valuable insights to demystify the application of Tangible Property Regulations, resulting in significant reductions in your client’s taxable income. Unlock the artistry behind these regulations to maximize their advantages. We will dissect the most prevalent depreciation and expensing opportunities for clients who own and develop commercial real estate and short-term rentals. Whether it’s Commercial Buildings, Apartment Complexes, Long-Term or Short-Term Rentals, Disposition of Materials, or Interior Renovations, each presents unique opportunities for expensing and accelerating depreciation, provided you have a foundational grasp of the regulations and access to the requisite cost data.
Rather than drowning in the complexities of regulations as is often the case in presentations, we will utilize real-world scenarios encountered by building and short-term rental owners to assist you in crafting a strategy for expensing and accelerating depreciation, including leveraging Bonus Depreciation. An integral aspect of our sessions is addressing your specific queries to empower you in confidently applying these regulations to meet your client’s precise requirements. Hundreds of Tax Professionals have consistently rated CSSI’s team of presenters and content as excellent. We cordially invite you to join us for an engaging 1.5-hour discussion filled with strategic insights and ample time for addressing your inquiries. CPE credits are available for CPAs through our NASBA certified provider.
LEARNING OBJECTIVES
By the end of this lesson, attendees will be able to discuss advanced depreciation and expensing strategies related to cost segregation including:
•Common scenarios for expensing and accelerating depreciation using the Tangible Property Regulations and Cost Segregation
•Advantages of Short-Term Rentals
•When to use Bonus Depreciation vs Section 179
•Renovation Depreciation — When to use Partial Asset Disposition (PAD) and Qualified Improvement Property (QIP)
•Grouping OpportunitiesYour clients who own buildings may be eligible for substantial deductions. Grasp the implications in these real-life scenarios to deepen your understanding of strategies and gain a competitive edge, ultimately affording your clients the deductions and cash flow they rightly deserve.
REGISTRATION INSTRUCTIONS
•You must register for and attend the entire session to receive CPE credit.
•A course evaluation must be completed to receive CPE credit.
•Group attendance will not be recognized. Each attendee must be logged in individually to receive credit.
When you register, you can put my name down as the rep who invited you.
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.
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.
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.
Cost segregation is a terrific strategy for any commercial building owner. New retail development tends to do quite well we are finding especially in part because of the land improvements to develop the property. New retail buildings for Starbucks for example are excellent for cost segregation.
With a new Starbucks not only do you tend to see great numbers from the 15 year class life category but also in the 5 year as well as the stores tend to be finished nicely.
If you’re interested in getting a no-obligation free estimate on your building, please don’t hesitate to reach out at 864-276-1448. I work all over the U.S.
Dental buildings have really come a long way. We are seeing more and more of them with beautiful design and finishing. Many now cost between $1.5 – $2.0 million. That’s a big expense for anyone and especially for dentists who may well be continuing to pay for dental school loans.
If the ownership of the operating business and the LLC that owns the dental building are the same, the dentist can group these entities the first year they put the building into service. That allows the operating LLC to take advantage of the depreciation generated by the real estate LLC. The tax savings can be significant.
Many of these buildings will see 20-30% of the building cost or basis able to be depreciated in the first year. For buildings placed into service starting in 2023, the bonus depreciation drops from 100% to 80% so please note that.
Recently we saved this dentist well over $100,000 on their income taxes when we did an engineering-based cost segregation study for them.
Businesses depreciate capital assets and buildings which is all part of standard accounting. I found this article on depreciation methods to be particularly helpful when trying to understanding the different methods of calculating accelerated depreciation. This is more from the perspective of capital assets for a business. The article looks at double declining depreciation method as well as the sum of the year’s digits methods.
