The thing with real estate is that it might be the ultimate entrepreneurial business. I know a number of these folks who have launched the Greenville, SC brokerage for Trinity Partners. Trinity Partners is established in Charlotte, Raleigh, Columbia, Atlanta and now Greenville, SC.
It’s hard to go wrong with brokers here in the Upstate of South Carolina. There are many of them. The folks who started this brokerage under the umbrella of Trinity Partners were successful young brokers at a couple of other brokerages here in the Upstate. They now offer a full service brokerage firm including property management services.
I wish them all well as they launch out on their own to build their own opportunity in commercial real estate brokerage. The Upstate Business Journal has a good article about Trinity Partners Greenville and how they continue to grow this real estate brokerage.
**Maximizing Your Tax Savings on Building Improvements**
Let’s talk briefly about the tax benefits you might be missing out on with your building when spending money for tenant or capital improvements. If you did a $375,000 tenant improvement or capital improvement to your commercial building in 2024 and are not doing cost segregation, you’re likely overpaying your income taxes by $10,000 to $15,000 over the next five years.
Today, most of these improvements go unstudied, leaving building owners with significant, unclaimed tax savings. Typically, CPAs will record improvements as “qualified improvement property” (QIP) with a 15-year class life, which allows for 60% bonus depreciation. While that’s within the tax code, this approach often overlooks substantial five-year property within the improvements, which could yield faster and more significant tax deductions.
**Why a Study Makes Sense**
When improvements are carefully studied, a sizable portion (15–50%) can often qualify as five-year property. For example, a $375,000 improvement could yield 30-40% in five-year property. Without a study, you miss the opportunity to accelerate your deductions and enhance your cash flow.
Consider this example:
– If a study costs around $3,500, your net tax savings start showing by year two. By year five, you could be ahead by $10,000 or more.
– Even with a conservative outcome of 25% five-year property, your savings could be around $6,000 over five years; at 50%, you might save $15,000.
These are potential savings you’re leaving behind if you simply default to the QIP classification without a study.
**Optimize Your Investments**
This isn’t just about tax savings; it’s about making the most of every dollar you invest in your property. Those savings could fund more improvements, support business growth, or even personal goals.
**Let’s Get Started**
I’m John Murphy with CSSI. I’ve developed a custom calculator to help building owners and CPAs understand the real potential of cost segregation on improvements. I work nationwide, and with our network, I can handle projects in all 50 states efficiently, without incurring travel costs. So while I’m in the Southeast, I can study buildings across the rest of the country and it does not cost you more money. If you did improvements in 2024 that were more than $200,000, call me for a conversation. There’s no cost or obligation. I can run the numbers for you and you can see how this might help you.
Let me ask you this…and I don’t care how much money you have…if you knew that there was $10,000 that could be in your bank account over the next few years but instead is sitting there in the government’s IRS accounts, wouldn’t you want your money?
Learn more on my blog at www.costsegbuilding.com, and connect with me on LinkedIn or social @costsegbuilding. Let’s discuss how a study could benefit your next project and help you maximize your building’s tax efficiency.
John Murphy, CSSI / 864-276-1448 / john.murphy@cssiservices.com
This is a fantastic explanation of Cap Rates by Ron Oxtal, MAI, Tropical Valuation Advisory, Tampa, FL. There are many variables and just because the Federal Reserve lowered interest rates by 50 basis points last week, don’t expect Cap Rates to move for commercial real estate.
Here’s the link to the Globest article referenced in the LinkedIn post above.
Sources: Roddy’s Foreclosure Listing Service and The Real Deal
We’ve been hearing a lot about the financial stress and loan failures in the commercial real estate world for the past couple of years. It does seem to be accelerating and spreading. Now there are signs that the much vaunted multi-family asset class is showing signs of increasing distress.
Multi-family distress reached 5.71% reaching a nearly 9 year high according to GlobeSt. This is still better than the 11.91% distress in Office according to CRE Daily on multi-family distress.
We’re likely at the start of a three-year cycle of increasing multifamily distress,” Silverman told GlobeSt.com, explaining that many property owners who took advantage of favorable lending conditions between 2013 and 2017 are now struggling.
Mark Silverman, partner at Locke Lord, CRE Daily Article
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.
Buying a strip mall as an investment? Do you know if there has ever been a drycleaners in that strip mall before? Were they cleaning on the premises or was it strickly just a drop off and pick up store?
This a very informative string of Tweets from The StripMallGuy about concerns regarding dry cleaning tenants and if they have every used the space you are considering buying as you evaluate a strip mall. He has an entire thread and I would encourage you to read it if you’re in the business of buying strip malls. And to his point…if you are a seller trying to sell a strip mall, at least consider getting a Phase 1 study completed prior to listing the property. It will make life easier on everyone and not waste buyers’ time nor their brokers. Give him a follow on Twitter. He always has valuable insights. You can follow me as well at @costsegbuilding.
Tired of strip mall owners burying their heads in the sand about the dry cleaner issue.
Wasting the broker's time. Wasting the buyer's time.
Kills more of our deals than anything else, and it's not even close.
I often get asked exactly how can a building owner benefit from doing cost segregation. Lots of times this comes up in conversation with commercial real estate brokers. I’ve recorded a pretty straightforward 4 minute video that hopefully will be of help to both CRE brokers representing building owners buying property as well as for commercial property owners.
We always recommend that owners should consult with their own tax advisors before moving ahead with a study. I’m not given tax advice – just an example of how an owner may benefit by doing cost segregation.
Get an estimate for your building. Rather than having a conversation with your tax advisor as to whether or not you might benefit from this without a formal estimate in your hands is just guesswork. Too many times the tax professional will say I don’t think it’s worth it. But when you have the numbers in your hand and can discuss the situation intelligently, then the parties can make an informed decision instead of guessing based upon the tax professionals prior experience or opinions of this tax strategy.
BTW, this doesn’t need to be done just on $1-$2MM+ buildings…we study all kinds of buildings – big and small – inexpensive and expensive. If you have a commercial property or residential investment property with a cost basis of more than $175k, it’s worth running the numbers. I work all over the country. There’s no cost or obigation to have us run the numbers. I publish lots of information on my blog at www.costsegbuilding.com. Find me on Twitter, Instagram and Youtube under the handle – @costsegbuilding hashtag#costsegregationhashtag#commercialrealestatehashtag#commercialrealestatebrokershashtag#CRE
This post is especially for commercial real estate brokers who own buildings and have extended their 2023 taxes. Assuming you have some tax liability for your earnings in 2023, if you own a commercial building(s) and/or residential investments and you have not done cost segregation on those buildings, this would be a great time to see if this can work for you. This may be especially beneficial if you have a significant tax liability and if you are planning on holding your buildings. This also goes for those who aren’t CRE brokers but own commercial real estate. If you own a profitable building that you plan to hold for another 3 or more years, why not look at the impact a cost segregation study could have on your tax liability and cashflow for the property.
Get an estimate in your hands so you can have an informed conversation with your own tax advisor to see if doing a study now makes financial sense.
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
In talking with various property management companies, they often keep track of all kinds of things about an owner’s building…expenses, repairs, inspections, improvements, life expectancy on components and regular review of the property. Many also keep the books as well and know the profitability of the owner. They may or may not include the tracking of the property taxes, debt service and depreciation.
But that said, as managers of the property to help the owner maintain a profitable business, in my opinion, they should be having conversations with their owner clients and find out if they have done cost segregation or not for the building for tax savings. Cost segregation can help with profitability and cash flow – right in the wheelhouse of most property managers.
Property managers should also remember that if there are significant improvements done to the property, they should consider studying those improvements – partial asset disposition (PAD) and cost segregation. There is often significant tax savings for the owner if they do this after a significant renovation ($100,000+). There are some rules of course that must be followed but it’s important to look into it. If the building has been owned for at least one tax year and they do big improvements, it might qualify for PAD. PAD allows for a tax deduction in the tax year in which the work was done. It also removes basis from the depreciation schedule as the property that has been thrown out is calculated and removed from the schedule. That way the owner doesn’t end up being subject to recapture tax for property that is now longer part of the building. It’s a 2 for 1 tax benefit. The vast majority miss this from what I can see.
Property managers, as trusted advisors to property owners, can play a crucial role in identifying opportunities for tax savings through cost segregation and PAD. By proactively engaging in conversations with their clients about these strategies, property managers can help owners maximize their tax benefits and enhance the overall profitability of their investments.
Many property managers across the country are part of our referral partner program where they can earn a referral for each study that we do for their clients. If you’d like to learn more, please reach out to me and I’d be happy to discuss. — John Murphy 864-276-1448
