Cost Seg Building

A Blog About Tax Savings for Building Owners

Tag: Building Owners

Can Cost Segregation Be Applied to a Building that Has Been Owned for Several Years?

October 18, 2024 / / 0 Comments

Yes they can. Generally speaking if you’ve owned the building for more than 12 years or so, it’s probable that it may not be worth studying. But that said, I always encourage owners to let us take a look. It could be that there is still enough basis to make it worth your while. It also could be that we identify capital costs that could be converted to expenses – i.e. the capitalization to expense study.

Cost segregation studies can typically be applied retroactively for properties that have been placed in service within the past several years. Specifically, you can:

  1. Go back as far as 1987: The IRS allows cost segregation for properties placed in service after 1986, when the Tax Reform Act of 1986 was implemented. However, practical and useful applications are usually focused on more recent properties.
  2. Catch up with a retroactive study without amending returns: If a property has been in service for several years, a cost segregation study can be performed now, and the missed depreciation can be “caught up” by filing a Form 3115, Change in Accounting Method. This allows you to claim the cumulative missed depreciation in the current tax year without having to amend prior-year tax returns.

About 40% of the studies we do at CSSI are “look-back” studies where the owner has owned the property for a year or more. I’d be happy to talk with you to see if it might make sense for you to do cost segregation on your property.

John Murphy CSSI

Keep Your Cash – How a Cost Segregation Estimate Can Help with Quarterly Tax Payments for Building Owners

April 10, 2024 /

Building owners….did you know that you could use an cost segregation ESTIMATE to help you manage your cash flow and perhaps pay less in quarterly tax payments or year end payments? How? Follow along…

When we provide an owner with an estimate, we are almost always conservative in our projection. If we say we believe that we’ll be able to identify say $200,000 in additional increased accumulated depreciation expense, we’ll normally hit at least that number 96-97% of the time. Occassionally the actual results come in a bit lighter.

But let’s say you owe a quarterly tax payment of $15,000 this quarter. You own a building but haven’t done cost segregation on it yet. Your building is profitable and the reason you own the tax money is in a big part because of the commercial real estate you own or the business you operate at the CRE building you own. You contact us. Our team done an initial analysis and says we can identify $200,000 in depreciation. Let’s say your tax rate is 32%. And let’s say you put this building into service in 2023 so bonus depreciation is 80%. Here’s the math:

$200,000 in depreciation x 80% (bonus depreciation) x 32% (tax rate) = $51,200 in estimated tax savings. We will provide you with a nice PDF for your records. You can use the depreciation expense expectation in the calculations you and your tax professional run to figure out what your quarterly payment might need to be. It could be that our estimate will wipe out your quarterly tax obligation. In this scenario noted, it very well could have done that.

This strategy can be used at any point in the year. It doesn’t just need to be reserved for year end tax planning. Reach out if you have questions and would like to discuss. John Murphy, Cost Segregation Specialist, 864-276-1448

Cost Segregation in South Carolina

February 10, 2023 /
Photo Credit: John Murphy, Cost Seg Building

If you’re a building owner or a tax professional, CPA, Enrolled Agent, etc., and you’re looking for a cost segregation specialist here in South Carolina, I’m happy to be of help. I’m based out of Greenville, SC and represent Cost Segregation Services, Inc. The company has been studying buildings for 20 years. During that time we have successfully completed more than 35,000 engineering-based cost segregation studies across all building types and classes in all 50 states. While I’m based in South Carolina, I can study any buildings anywhere in the U.S.

Here’s a short video on what we do for building owners.

Cost segregation works on all types of buildings where the owner is receiving a lease or rent payment. In other words, it can’t be your personal residence. Typically the basis or cost needs to be north of $200,000 in order for the economics to work for the owner, but we have done some studies on buildings with a basis as low as $150,000. This works on commercial buildings, retail strips, self storage facilities, hotels, apartments, single family rentals, Airbnbs, short term rentals, offices, warehouses, industrial, shopping centers etc.

Call me at 864-276-1448. I can provide a no cost, no obligation quote so you can discuss it with your tax advisor to see if doing cost segregation makes sense for you financially.

Tenant Improvements – Should They Be Capitalized or Expensed?

November 29, 2022 /
Photo: John Murphy, Cost Seg Building

Dumpsters will often catch my attention 🙂 I wonder how many building owners who are paying for TI’s / Upfits in a building like this capitalize the improvements rather than expensing them? I don’t know anything in particular about this specific building. I don’t know what the upfit costs will be but it was stripped to the studs. Let’s say it’s $50-$75k to renovate this space? Would you capitalize it? Expense it? Let’s assume the owner has had this building in-service for at least one tax year. Since this is one of 4 units in this building, we would think expensing those improvements utlizing the Tangible Property Regulations would be the way to go.

If you happen to have a building where you think you may have capitalize improvements / TIs where perhaps they could have been expensed, feel free to reach out. We can help you figure that out at no cost. If it turns out you can and should do a capitalization to expense reversal you might be able to do it on your own…if you need our help, I would get you an estimate. BTW, these typically are absolutely monster tax savings or the owner 🙂

TI #TIs #tenantimprovements #upfit #interiorbuildout #commercialproperty #commercialbuilding #retail #retailstrip #stripcenter #taxes #taxsavings #TPRs #tangiblepropertyregulations #repairregs #capitaltoexpensereversal

Cost Segregation for a Panera Bread Building – $100,000 Tax Savings

September 15, 2022 /
Photo Credit: John Murphy, Cost Seg Building

Cost segregation works pretty much on all commercial buildings. If the building cost is north of $175,000 or so, there are tax savings being left on the table if the owner does not segregate the building in to 5, 7, 15, and 39 year class lives which is what happens when you do an engineering-based cost segregation study.

What might one see for results in such a study for a Panera Bread commercial building? Well, the owner might save about $100,000 on his/her income taxes by doing a study. The cost of the study would be a small fraction of the overall savings.

Let’s say in this scenario we have the following:

Building Cost: $1,500,000

Increased Accumulated Depreciation: $310,000

Estimated Tax Savings @32% Federal Rate: $99,200

The building owner doesn’t have to write a check to the IRS for that $99,200. The money stays in his/her bank account and they can do with it as they see fit….remodel bathrooms, buy a new building, buy a new car, pay off debt, increase wages for employees, buy a short term rental, take some vacations….they money is there’s and remains with them. I don’t care how much money people have…they could have millions, but there hasn’t been a single person yet that I’ve come across who says they aren’t interested in keeping an extra $100,000. And it doesn’t have to be $100,000….we run scenarios for all kinds of property…let’s say you own a building that is only $300,000 but by doing an engineering-based cost segregation study, you might be able to save $15,000-$20,000 on your taxes. That’s real money and people would rather keep that money in their bank accounts rather than the IRS’s.

Note, the numbers above are estimated tax savings. Each study is different and we wouldn’t know the final results until the actual study is completed. A building owner’s tax situation and tax rate might be different. If they were in the 37% tax bracket their tax savings would be quite a bit higher. If they are in a lower bracket then the savings would be lower. As always, I can’t give tax advice. When considering cost segregation, get an estimate and then discuss it with your own tax professional to see if you can benefit from doing a study.

Why Commercial Brokers Should Offer Cost Segregation Services

September 14, 2022 /

Commercial brokers play a very important role in the ongoing development and improvement of a community. They are often in-the-know of what’s happening in a particular area…who’s developing what and which companies are moving in and/or expanding. They help business owners, building owners and investors of all kinds with sourcing or developing a building or project to suit the prospective owner’s needs. They often can help give recommendations on financing, inspections, engineering, surveying, insurance, renovations, construction etc. The one area they are weak in is in cost segregation.

Why should commercial brokers have a trusted source for cost segregation amongst their mix of other expert advisers whom they can readily share with a prospective client? It’s pretty simple….commercial brokers should introduce cost segregation to every client and have each building evaluated. There’s no cost to do this and the upside is significant certainly for the client. The commercial broker can also generate another income stream for his brokerage by partnering with us to deliver this service to his clients.

We know the upside for the client on cost segregation but why wouldn’t the commercial broker also participate in creating another revenue stream? Ask me about our referral program. It can help pay for some office lunches, outings and year end parties. But the bigger thing is that the broker will have helped his client maximize his/her building by saving a lot of money on taxes. The tax savings provided to the client might actually be enough to help that building owner go buy another building of which the broker may represent him/her on that and make another commission.

Remember, not every building or every building owner is going to need to actually do a cost segregation study. Some buildings aren’t profitable and maybe won’t be for some time. Some owners aren’t particularly profitable either and so they don’t need the tax deductions. However, every building should be evaluated so you at least have it on hand and can reference it each year as you review your particular tax situation for that year. Perhaps you don’t do cost segregation for a variety of reasons in 2022…maybe not even in 2023. But by 2024, it probably makes more sense. Well, a smart business owner, building owner and investor is going to know what that might look like for him or her. There’s no reason they should not have an estimate on hand and in their files. It should be part of a normal business and tax review process if not quarterly…at least annually.

Cost segregation will save big money for most owners. They might see between $30,000 – $70,000 in income tax savings per $1 million in building cost or basis. We can do studies on buildings with a cost or basis as low as about $175,000.

Lastly, I will say that as I speak with building owners, 8 or 9 out of 10 have not heard of cost segregation. Of those that might be familiar with it, there’s a lot of misperceptions as to it’s value vs. it’s cost. It’s very common for me to quote estimates that demonstrate a 10, 15, 20:1 return on their investment in the study. That’s a 1,000 – 2,000% return. Most commercial real estate delivers returns in the 5-8% range…we’re talking massive returns here with cost segregation compared to the investment in the study. The most likely way a building owner would hear about cost segregation would be through the commercial real estate broker. Please share the information…make an introduction and let’s help building owners maximize their buildings, lower their taxes and increase their cash flow.

Be sure to reach out and I’d love to help – John Murphy, 864-276-1448

When Should You Do a Cost Segregation Study?

September 4, 2022 /

This question comes up a lot. Normally the best time to do a study is right at the time of purchase or when it is placed in service. It will allow the owner to maximize the accelerated depreciation available to him/her. Having a cost segregation study done that includes the defining of the key building systems will prove helpful for building owners to stay in compliance with the Tangible Property Regulations that went in to effect in 2014. But the truth is an owner can do it almost at any point in time of their ownership. You will want to get an estimate and if you’ve owned the building for some time, we’ll need to review your depreciation schedule to see if there is any an opportunity for you to benefit from accelerated or catch up depreciation. Remember, most building owners see an income tax savings of between $30,000 – $70,000 per $1 million in building costs (basis).

If you end up waiting a year or more from the time you purchased the property or put it in to service, you will have to file an IRS form 3115. It’s a change of accounting form that gets used for a lot of purposes. It gets filed all the time so there’s no worry to think just because one of these needs to be filed that you’ll open yourself up for audit. We have not seen that to be the case. The form is a bit complicated. The firm I represent will produce a draft of the 3115 and calculate the negative 481a adustment for $750 and then the building owner’s CPA would sign off on it. If the CPA won’t sign off, then we will for another $500. Most CPAs like the fact that we take care of the 3115. This isn’t a huge expense but it does add to the overall cost of a study. Let’s say your study costs are $4-$5k. The 3115 is going to add about 15-20% to the overall cost. Again, not a big deal but you just need to be aware of this.

What if you can’t use all the accelerated depreciation in the year you have the study done? Well, you can carry the loss forward and put that to use unlil that loss is consumed. I have seen many times where owners don’t have to pay income taxes on their property income for 2, 3, 4+ years or more sometimes because of the accumulated accelerated depreciation that was generated from a cost segregation study. I cannot give tax advise. I’m just sharing what we’ve seen other building owners and investors do. Please consult with your tax advisor when considering doing a cost segregation study and whether or not you can benefit from it.

Want to talk about it? Reach out and I’m happy to have a discussion and can provide you with an estimate.

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