CSSI will be hosting these webinars once per month in 2025 so if you can’t make this, there will be others. Just let me know if you’d like to be on my mailing list. Also, let me know if you’d like a copy of the presentation slides and video recording. While these tend to be geared toward CPAs as this one will be a continuing education course for CPAs, CRE brokers and commercial property investors are welcome to attend if you’d like to learn more. There is now cost.
CSSI Webinar: Applying 100% Bonus Depreciation Retroactively for Commercial Property and Short-term Rentals (Airbnbs, VRBOs).
Wednesday, February 19, 2025 at 11:30am to 1pm Eastern
Just a reminder that bonus depreciation is still available on buildings. I do expect we’ll see 100% come back soon for 2025. If you put a building into service back in late 2017 through the end of 2022, you can still grab 100% bonus depreciation on assets with class lives 20 years or less. No need to amend your tax return. You can take it on your current tax return. We can draft the required 3115 Change of Accounting form for you. Easy peasy.
Let’s say you are self renting – i.e. you are running a business out of a building you own…if you grouped that entity with the real estate in the first year you put the building into service, you can go back and grab that remaining bonus depreciation to help reduce your operating income for your business. (There may be some nuances so check with your tax advisor).
And for those who say cost segregation might not be worth it if it’s only 40%, I just completed one where the owner will get $450,000 in a depreciation expense because he did cost segregation vs. $60,000 which is what straight line depreciation was going to provide. But hey, it’s your money. If you want to leave $10k, $20k, $50k, $100k of tax savings just sitting in your building and not your bank account, that is your perogative. I’m just the messenger here letting you know of an amazing opportunity many owners still are not taking advantage of.
Don’t let your tax advisor tell you your building is not worth studying unless you have an estimate in your hands that you and your tax advisor can discuss. Get the facts.
If you’re unsure whether your property qualifies, let’s run the numbers. Message me, and I’ll get something back to you in a day or two so you can at least know if you are leaving money in your building.
I recently received a call from a CPA with questions about oil service buildings and their tax treatment. There’s a common misconception that these buildings are 100% deductible, but that’s not entirely accurate. Many commercial real estate brokers market the supposed automatic bonus depreciation benefits of these properties, but the reality is more complex. Unlike convenience stores (C-stores) or tunnel car washes, oil service buildings face more challenging qualifications in order to claim it all as 15 year class life. We have not heard that the IRS is scrutinizing how owners are depreciating these buildings, but it would seem to be a pretty easy target given the assumptions many in the industry make about oil services buildings.
Understanding the Classification Nuances
Let’s start with the fact that commercial property is considered 39 year class life property meaning you get to depreciate it over 39 years. That amounts to 2.5% of the building cost per year is taken as a deduction (1/39). Oil service buildings might be able to be identified as 15 year class life and thus eligible for bonus depreciation. Bonus depreciation used to be 100% from Sept. 27, 2017 – Dec. 31, 2022. The law has it declining 20% each year until it is zeroed out by 2027. For 2024, bonus depreciation was 60%. (Congress will be considering reupping the Tax Cuts and Jobs Act which would bring back 100% bonus depreciation, but we won’t know that until later this year in 2025). Properly classifying oil service buildings under the 15-year class life rule isn’t as straightforward as it is for C-stores or tunnel car washes. Owners and their tax advisors should thoroughly understand the rules and ensure proper documentation to avoid potential IRS challenges.
For oil service buildings, the critical qualification is that 50% or more of the revenue must come specifically from petroleum sales. Oil of course is petroleum but the labor to change the oil is not. Oil service shops sell other services and products that further make it difficult to achieve that 50% petroleum sales threshold. It’s not uncommon to see these shops selling other fluids, filters, wiper blades etc. Brands such as Jiffy Lube are expanding beyond oil changes to provide other services. This seems like a smart move for the brand to capture more of the expenses Americans have with maintaining their cars. Jiffy Lube now has these beautiful, larger, modern MultiCare buildings. No doubt this is good for business but just note it’s likely going to make it very difficult to achieve that 50% petroleum sales qualification to claim the entire building as 15 year class life.
Claiming Depreciation: When It Works and When It Doesn’t
If an oil service building meets the qualifications, tax advisors can claim the entire property under the 15-year class life and apply the appropriate bonus depreciation. For example, if a $2.5 million building (with $500,000 allocated to land) was placed in service in 2024, the owner could claim 60% bonus depreciation on the $2 million building value, resulting in a $1.2 million deduction. This approach avoids the need for a cost segregation study.
However, if there’s any uncertainty in meeting the 50% revenue threshold and proving it with documentation, then conducting a cost segregation study is a likely a wise investment.
Why Cost Segregation Makes Sense
If you cannot achieve that 50% petroleum sales criteria, then a cost segregation study will almost always make sense. Oil service and multicare auto service buildings have a lot of 5 year and 15 year class life property. You should identify this property to maximize your deprecation. It’s also helpful to have this segmented in the event you have to replace some of this property over the normal course of operations of your business. It makes dispositions much easier which again will help you save money on your taxes. a cost segregation study can still provide substantial benefits. Many of these buildings will see 30, 35, 40% of the overall cost of the building reclassified to 5 and 15 year life providing the owner with a significant deduction in the year in which the cost segregation study is applied.
Looking ahead to buildings placed into service in 2025, bonus depreciation will be 40% unless Congress enacts changes. If lawmakers restore 100% bonus depreciation, property owners may be tempted to skip a study and claim 100% depreciation on these oil service buildings. At the end of the day, that’s a call that’s up to the owner and his/her advisors. We get a chance to evaluate a lot of these buildings as you might imagine. Most of the buildings do not hit the 50% threshold. It’s not us making that determination to try to get a study out of the owner. This analysis is done by the owner / operator and tax advisor and they usually can’t confidently say they hit 50%.
Avoiding Costly Mistakes
Incorrect depreciation claims can have serious consequences, and if the IRS decides to target owners of oil service buildings, they would be easy targets. If you own a building or if you are a tax advisor who has a client who owns one of these buildings, if they can’t confidently document that they hit the 50% petroleum sales qualification, then do the smart thing and have a cost segregation study done. You’ll sleep better at night knowing that you have the proper documentation and classifications of your building backed up by an experienced third-party cost segregation company.
The Bottom Line
If you want peace of mind and confidence in your depreciation strategy, a cost segregation study is a valuable tool. The cost of the study is minimal compared to the potential savings and security it provides. Don’t take unnecessary risks—ensure you’re depreciating your oil service building correctly to maximize your depreciation and tax benefits while complying with the law.
Reforming Tax Policy: Ideas for Stability and Growth
On Tuesday, November 5th, the American people voiced their support in a powerful way, placing control of all branches of the federal government in the hands of the Republicans under President Trump. As the new administration prepares to take office, a critical tax policy change looms: the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025. With tax reform on the agenda, I have some ideas that I believe would bring stability, encourage investment, and help revitalize struggling areas.
1. Make 100% Bonus Depreciation Permanent
The current policy of gradually phasing out bonus depreciation by 20% each year until it hits zero in 2027 is creating uncertainty. Instead of this cycle of temporary extensions and percentage adjustments, Congress should establish 100% bonus depreciation as a permanent feature of the tax code. This policy gives investors, developers, and business owners the confidence they need for long-term planning. Locking in 100% bonus depreciation would encourage investment, drive development, and spur economic growth, especially in underdeveloped areas. Congress has an opportunity to pass this legislation in early 2025, making it retroactive to 2024 so taxpayers can benefit immediately.
2. Fix the R&D Tax Credit
The Research & Development (R&D) Tax Credit needs an overhaul. Currently, the amortization requirement penalizes American businesses by forcing them to spread out deductions over five years instead of allowing a full deduction in the first year. Get this corrected for the 2024 tax year.
3. Capital Gains Tax Relief for First-Time Homebuyers
On the residential side, we need policies that increase the availability of homes for first-time buyers. One potential solution: allow investors who sell rental properties to first-time homebuyers to bypass capital gains and recapture taxes on the sale. By doing so, we could open up more housing inventory and make homeownership more accessible to younger generations. This concept, inspired by my friend and colleague Craig Kamman, offers a practical approach to addressing housing supply and affordability.
4. Update the Capital Gains Exemption for Homeowners
The current capital gains exemption for homeowners—$250,000 for individuals and $500,000 for married couples—has been in place since 1997. Given the significant increase in housing prices over the past two decades, these thresholds no longer reflect today’s real estate market. Adjusting the exemption to $1 million for individuals and $2 million for couples would reflect current home values, reduce tax burdens for sellers, and better align with housing inflation.
So you are excited to take advantage of bonus depreciation, but did you know that most states don’t fully conform with the federal bonus depreciation rules? Many states don’t allow any bonus depreciation to be able to be taken. Some states allow partial bonus depreciation to be taken.
Bloomberg has a comprehensive list of which states allow for bonus depreciation and which ones don’t. As always with anything with tax, please consult your own tax advisor to understand how bonus depreciation can benefit you on both a Federal and possibly state level when it comes to reducing income tax liability.
Car washes and specifically, tunnel car washes, have a favorable status in the tax code. Many who buy these know this already, but if the building truly is a tunnel car wash everything there can be identified as 15 year class life. But even tunnel car wash owners can benefit significantly by doing a cost segregation study. Let’s get into it.
For simple math purposes, let’s use some round numbers. We also are assuming that this was not purchased as part of a 1031 exchange. If that was the case, the basis would be lowered or possibly eliminated. One’s CPA would need to tell us what the remaining basis is in the new building. But let’s move on…
In this example, a tunnel car wash sells for $3,500,000. The land value is estimated at $500,000 for this example. So we are left with a cost basis of $3,000,000. If the property was purchased and placed into service between Sept. 28, 2017 and Dec. 31, 2022, then the full $3,000,000 can be depreciated as 15 year class life property in year one. If you have not done this yet and would like to do it, your tax advisor would need to file an IRS Change of Accounting Form 3115. (We draft these for $750 with cost seg studies). If your car wash went into service in 2023, you could take 80% of the $3,000,000 right away in a depreciation expense – i.e. tax deduction / write off. If it’s in 2024, then bonus depreciation goes to 60% – so 60% of the $3,000,000. You can do this without hiring a firm like ours. Just make sure you truly do have a tunnel car wash and always get the advice of your own CPAs.
Why should owners of tunnel car washes consider paying for a cost segregation study when all the property is already able to be classified on a shorter class life schedule at 15 years? Because, it’s likely that 40-60% of that $3,000,000 could be classified as 5 year property. Why would you leave something as 15 year property when for a cost between $7-8k you can have an engineering-based cost segregation study clearly reclassify all your building components into their proper class lives. When bonus depreciation was 100%, this would not benefit you from an upfront depreciation tax deduction benefit, but it would help you when you go to sell. If bonus depreciation is anything less than 100% as it has been in 2023 and 2024, then you can benefit from doing a study both on the front end with more depreciation in the early years of ownership plus you can benefit when you go to sell.
Depreciation: in 2024, you can take 60% of property with a class life of 20 years or less. So using our example above, you have $3,000,000 and can take 60% or $1,800,000 in year one. The remaining 40% will be taken over the next 15 years as it’s 15 year class life.
But let’s say you study the property and it turns out 50% is 5 year and 50% is 15 year. That’s $1,500,000 for 5 year and $1,500,000 for 15 year. You use the 60% bonus depreciation and take $1,800,000 in depreciation expense. That leaves a total of $1.2MM but it’s actually $600,000 that is 5 year property and $600,000 that is 15 year property. That 5 year property gets depreciated over the next 5 years and then is fully depreciated given you a bigger tax deduction in the early years of ownership. The $600,000 of 15 year gets deducted over the next 15 years. So this is definitely a win. $600,000 depreciation deduction over 5 years at a 35% tax rate is a tax savings of $210,000. Now do you think it was worth spending $7-8k on a cost segregation study?
Now what happens when you go to sell the property years down the road. Let’s say it’s 6 years later. Well, you have fully depreciated your 5 year property. Some of it maybe has even been replaced already which is also nice to have a cost segreagtion study which makes dispositions of property a lot easier for your CPA. It saves him time and you can come up with accurate information. That’s a win for you as the owner as it saves you money from an accounting standpoint and you get another write off. But now you go to sell and it will be between you and your CPA what kind of recapture tax you end up paying. Clearly on the depreciation of the 15 year assets, there is still life on those so you’ll have some recapture. But with the 5 year property, you might be able to pay little to no recapture tax on that $1.5MM in depreciation you’ve taken because those components may not have much value any longer. But let’s say your CPA wants to be more conservative and say that he puts a value of $500,000 on that $1,500,000 you’ve taken in depreciation. You pay recapture tax on the $500,000 and NOT the $1,500,000. Recapture tax is paid at your earned income tax rate. So if it’s 35%, this strategy may have just saved you $350,000 in recapture tax when you go to exit. You’ll still have capital gains tax to pay of course and as with all things dealing with tax, please consult your own tax advisor before proceeding.
To sum it up…it we are able to use 100% bonus depreciation, cost segregation doesn’t help very much on the front end of your ownership but it can save you potentially a small fortune on the back end. If we are running at less than 100% bonus depreciation, then cost segregation can help both on the front end with greater depreciation deductions earlier in the ownership life of the building and help with saving on recapture tax on the exit. If you hold long term, having done a cost seg will help when you go to replace parts of the car wash that are no longer working. You’ll be able to take dispositions a lot easier. Those are good and important tax deductions.
I work all over the U.S. If you’d like to discuss or get a quote, please let me know. There is no cost and no obligation.
Many of us thought this was a done deal. In fact, I had thought for some time that Congress would extend 100% bonus depreciation. Part of me thinks they might eventually make it permanent as part of the tax code but there are many in Congress who like to have things like this to negotiate for other deals. If that’s the case, they probably won’t make this permanent.
The House of Representatives passed their bill about 10 weeks ago now. The Senate is still sitting on the Tax Relief for American Families and Workers Act. With all the wrangling going on over Ukraine, Israel and US border funding, things seems to be stuck in the Senate.
I’m so focused on commercial real estate that it hasn’t really dawned on me how this bill impacts other industries. Apparently this is a very big deal for American farmers and they also want this passed.
Most building owners who I know have opted, as they normally do, to extend their tax returns. This year it’s beneficial so they can see if they might end up getting a nice bump from 80% to 100% for their 2023 tax returns.
Anyone paying attention to Washington DC knows that our elected representatives have not put together a real budget. There is still lots to do when they get back to work 🙂 in early January. One of the things that has been floating around DC is the possible extension of the 100% bonus depreciation rule that was originally put into place by the Tax Cut and Jobs Act of 2017.
Many in commercial real estate and particularly the GPs who run the syndications for multi-family investments have become addicted to the 100% bonus depreciation rule. I like to call it the crack of real estate and tax. In 2023 it has moved to 80% bonus and in 2024 it’s scheduled to drop to 60% bonus depreciation.
Bonus depreciation comes in to play or all property with a class life of 20 years or less. When a cost segregation study is completed, the property that is normally all 39 year if commercial and 27.5 year if multi-family / residential investment, gets reclassified to it’s proper class lives which are 5, 7, 15, and/or 27.5 / 39 years. This allows for a much bigger deduction to be taken early in the life of the ownership of the property.
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.
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
