Tax Day for 2024 taxes has come and gone. Most building owners have filed for an extension on their taxes giving them 5 more months to get their corporate returns completed and 6 more for their personal returns. Now is the time to get those cost segregation studies completed so they are done well in advance of the true tax deadline.
I do cost segregation studies all over the country. We have a simple process that won’t cause you much headache at all. You can sleep confidently knowing the work was done by experts with a couple of decades of experience.
Most building owners and their tax advisors miss this KILLER tax deduction. How do I know they miss it? Because they don’t call me to get these studies done. Partial Asset Disposition SHOULD be evaluated every year for every building owner whether you own commercial property or residential investment property. But that’s ONLY if you legally prefer paying LESS in INCOME TAX as well as REDUCE your recapture tax liability down the road in the event you decide to sell your building.
I just finished up one of these recently where it was $280,000 in interior improvements for an office. That seems like pretty standard stuff. Most tax professionals won’t even have this small of a project studied. It was all interior so most would just call it QIP and be done with it. (QIP is Qualified Improvement Property and gets a 15 year class life). In 2024, bonus depreciation was 60% so you could take 60% of $280,000 or $168,000 tax deduction. Awesome. The client just got a $168,000 and all it took was less than 5 minutes of his tax advisor’s time to figure that out. So it didn’t cost him much. Perhaps the tax advisor bills him $100 for his time to figure this out. Everything’s cool, right? Wrong. Wrong in a big way.
If the owner qualified for PAD – partial asset disposition – he should take PAD. (Note: there are some criteria as to if the improvement qualifies for PAD so the owner’s need to double check this with their cost seg firm and tax advisor).
In this scenario above, because the CPA was on top of his game and recalled this idea of a PAD, he reached out to discuss this particular project. We studied the improvement and did the PAD and did you know the owner ended up picking up an additional $118,000 in a deduction because he did PAD? That’s a net tax savings of about $40k after paying for the study. On top of that, since this property identified was tossed in a landfill, it gets removed from the basis of his building so when he goes to sell it, he will have less recapture tax to pay. If you don’t remove the property from your books that has been thrown away, you continue to carry something on your books that actually isn’t there any more. And you’ll end up paying more in recapture tax when you go to sell.
So in this scenario, if you don’t do PAD, not only would you be missing out on about $40k in immediate tax savings, but you’ll pay more in tax (recapture tax) when you go to sell your building.
So next time you are doing building improvement whether it’s interior or exterior and it’s over $100k, please remember to reach out and have a conversation with a cost segregation expert. These studies are not expensive. By doing them you are assuring your accounting and depreciation are being done correctly and you get some significant tax benefits both now and when you sell.
Industrial Outdoor Storage has seen a sharp rise in demand over the past few years and people look for places to store their trucks and trailers. You might not think these are good properties for cost segregation, but you would be wrong. These are phenomenal asset classes when it comes to taking advantage of accelerated depreciation generated by cost segregation.
Most IOS sites are nearly 100% land improvements. There’s site work, gravel, maybe asphalt and concrete. They have fences, security gates, lighting and some have small out buildings as well as utilities. Sometimes we’ll see flex buildings or truck terminals that also have large storage areas for trucks and trailers.
If you’re building these from scratch with all the cost detail, your tax advisor might feel comfortable just allocating the various line items and components to their proper class lives so you can accelerated depreciation. But if they are not comfortable with that or it you might want a 3rd party expert like our firm to do the study for a nominal fee, you’ll not only likely rest easier having an engineering-based cost segregation study completed becuase of the size of the deduction you’ll get, but you’ll then maximize your deduction and be assured everything is classified properly.
Let’s say you spent $1,000,000 on building your IOS – not including the land acquisition. Let’s say $950,000 ends up being reclassified. If you built this and put it into service in 2024, you can take 60% bonus depreciation. That would be an increased accumulated depreciation deduction of $570,000. That’s a a MASSIVE deduction. If you would sleep better at night knowing a firm like ours did the study, then just pay the small fee to get it done.
If you have purchased an existing IOS – i.e. you did not build it from scratch but rather have bought it after the fact – then you should look at getting a cost segregation study done. You will get a lot of benefit by doing that. We study them often and the results are extraordinary. Reach out to me if you’d like a quote. I work all over the U.S. in all 50 states.
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.
Sale-leasebacks have surged in popularity over the past few years, offering building owners a way to maximize their sale price while securing a long-term lease that enhances the property’s value. A well-structured sale-leaseback often results in a desirable cap rate, making the transaction attractive to investors.
But there’s another major financial advantage many overlook—cost segregation.
For buildings involved in a sale-leaseback, a cost segregation study is a must. These are often income-producing properties with long-term owners (typically 3+ years), making them ideal candidates for accelerated depreciation. Instead of keeping the entire asset on a 39-year depreciation schedule, 20-30% (or more) of the building can often be reclassified into shorter depreciation lives, leading to:
✅ Increased cash flow ✅ Higher investment returns ✅ Lower tax liability (even if it’s just a deferral, the time value of money matters!)
In short, cost segregation is a no-brainer for sale-leaseback transactions. Running the numbers costs nothing—and it gives property owners and investors a valuable opportunity to discuss tax-saving strategies with their CPA.
CRE brokers, take note: Getting cost segregation estimates for your clients not only adds tremendous value but also positions you as a well-prepared, knowledgeable advisor. In a competitive market, small insights like these can set you apart.
Want to see what cost segregation can do for your next sale-leaseback deal? Let’s run the numbers—at no cost to you.
For those who have a lot of income and tax liability who are building multi-family and hospitality properties, consider the following. It’s unlikely your tax, financial and construction advisors are taking all of these strategies into account.
Build with Green Zip Tape. By doing so, about 10% of your construction costs will move from 39 year life to 5 year life allowing you to take bigger depreciation deductions earlier. This is above and beyond what you would normally get with cost segregation. $10MM project might see an additional $1MM in 5 year life. At a 35% tax rate that’s $350,000 in income tax savings or deferral. No brainer.
Utilize 263(A) if you qualify. This allows you to EXPENSE indirect costs associated with the construction of your building. This works for self constructed assets. Must be a small business and fall under the government requirements (about $30MM in revenue or less). Can’t be a syndication. If you are building this for your own investment or own use, look into it. $10MM project could see 10-15% written off as EXPENSE and not capitalized. Also can be utilized in a tax year prior to your building going into service – say you started construction in 2024 but won’t finish and go into service until 2025…you an write off some of this on your 2024.
179D – Energy Efficiency Tax Deductions….this is for buildings with 40,000 SF or more (our requirement – not the government’s). We say 40,000 because there’s a cost vs the deduction analysis. At 40,000 it definitely makes sense. It might work at 30-35,000 SF. Might see a deduction of $.88/SF to $1.16/SF…could go all the way to $5/SF but many hurdles for that. Let’s call it $1/SF…that’s a $40,000 deduction for a 40,000 SF building. Nice thing is this deduction essentially comes out of the 39 year class life. It is not subject to potential limitations of bonus depreciation. If you’re going to hold the building, it’s also a no-brainer if you need to maximized deductions.
Cost segregation – of course this is the BIG tax deduction. Many building owners will see 20, 25, 30% of their building reclassified to 5 and 15 year life giving them a massive up front deduction. Without cost segregating your building, you will deduct 2.5% per year of the building cost (1/39). $10MM building cost could see $2-$3MM in depreciation expense moved to 5/15 year life. Depending upon the bonus depreciation rules at the time they might be able to take part or all of that either in year one or early on in their ownership.
As with all of this, please consult with your tax advisor before proceeding. If you’d like to discuss your project or any of these items noted above, please let me know. Connected with me on LinkedIn.
It what will go down as an historic week in U.S. history with the inauguration of Donald J. Trump to his second term as President of the United States, he made news at Davos at least for the commercial real estate industry.
Many have speculated that Trump would bring back 100% bonus depreciation in 2025 as he extends his 2017 Tax Cuts and Jobs Act. He confirmed this yesterday during his video presentation to the 3,000 attendess at Davos Switzerland where the WEF and global elites were meeting to plan our futures.
During the Q&A, Brian Moynihan ask President Trump a very broad economic question. As Trump was answering it, he made mention that he will be bringing back 100% deductibility in the first year – i.e. 100% bonus depreciation. You can hear his comments at the 30:35 mark of the video presentation. This will be great news for the commercial real estate industry. Of course he has to negoatiate this with the Democrats but this nearly got extended a year ago when Biden was President. It never made it to his desk for his signature as the Senate killed the bill. It’s different this time though. The Trump Tax Cuts are set to expire in 2025 and no one wants to be on the hook for a big tax increase. Additionally of course you have the leadership of Trump at the helm driving this instead of the much weaker Republican Congressmen and Senators. I’d be shocked if this doesn’t get approved. Not sure of the timing but I think from what I’ve heard it will be April perhaps before they get something done.
If you’re doing cost segregation studies right now for 2025 taxes, there’s no worries. When we do our studies, the results are the results and your tax advisor will apply them appropriately whether it’s 100% bonus depreciation or if it remains at 40% depreciation which is what the 2025 law current states.
It might be just a bit too early to fully assume that this will be the case for 2025 but you might want to start to run 2 scenarios with your pro-formas…one for 40% and the other at 100% bonus depreciation.
My hope is President Trump pushes to make bonus depreciation permanent. He wants America to get back to growth. The 100% bonus depreciation affects a lot more than just owners of commercial real estate. It would seem to me to be a no brainer that if you want to make American the growth engine of the world and have Trillions of dollars of capital investment find their way here, make this incentive permanent. No more 4-5 year shots for it to be renegotiated.
If you’d like to watch President Trump’s address to the attendees at Davos, the recording is below. He mentions 100% deductibilty at the 30:35 mark.
Owners of bank buildings and branches are prime candidates for cost segregation studies because of the significant tax savings and financial advantages it can provide. It’s important to get a cost segregation study done so you have all the building components and systems identified. This is the case whether you continue to operate it as a bank or if you are repurposing the building. I have come across a lot of older bank buildings that are often being used as office space for a new tenant or owner.
Bank buildings are particularly well-suited for cost segregation studies. Their specialized design and features often qualify for accelerated depreciation, especially within the 5-year property class life. There are numerous specialty components that are unique to banking that offer valuable depreciation benefits.
Here are some key components and systems to identify for shorter class lives:
Specialty electrical and plumbing systems
Drive-up windows
Interior glass windows
Pneumatic tube systems
Night depositories
Safes and safe deposit boxes
Vault doors
Even if you’ve converted a bank building into more traditional office space, many of these specialty items often remain. Reclassifying these assets to their proper 5-year lives, rather than leaving them as 39-year assets, can yield substantial tax savings. Additionally, if you end up removing some of these systems, if you have identified them, you might be able to take a partial asset disposition which would yield another excellent tax deduction.
Nationwide Service with Local Expertise
While I’m based in Greenville, SC, I study buildings like this all over the country. Whether your property is here in the Carolinas or across the country in California, it costs no more to engage my services. Our nationwide network of professional photographers ensures we can efficiently document your property to provide an accurate and thorough cost segregation analysis. The firm I represent, CSSI Services, works nationwide in all 50 states and we work on all types of buildings.
Let’s Talk
If you own a bank building—or any commercial property—and want to explore the tax-saving opportunities of cost segregation, give me a call. I’m happy to provide a no-cost, no-obligation estimate for your building. It’s a simple way to uncover hidden value and improve your bottom line.
**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
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:
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.
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.
