**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.
Should you do cost segregation on tenant improvements? Most tax advisors and CPAs don’t bother. They just call it QIP (qualified improvement property) which gets a 15 year class life. If it’s 80% bonus as it was in 2023, they just claim 80% in year 1. If it’s in 2024, then it’s 60% and they take 60% bonus in year 1. But did you know that more often then not, the owner of those tenant improvements is paying more money in taxes than they need to be?
If you consider that with a lot of improvements, the 5 year class life will be 25 – 45% of the overall improvement, then it means there’s still more to squeeze out. Consider this scenario…$400,000 tenant improvement. Let’s say that 35% of that would get identified as 5 year class life. If it goes into service in 2024, the tax advisor or CPA is going to take 60% of $400,000 or $240,000 in year one for the deduction. However, $160,000 in depreciation remains and that will be deducted over the next 14 years. But in that $160,000, we said 35% is 5 year class life. 35% of $160,000 is $56,000. So you might now have $56,000 that you could have taken over the next 4 years now lumped together with the 15 year QIP and it gets spread out over 14 more years. For those keeping track, a $56,000 tax deduction at a 32% tax rate is about $18,000 in taxes. So in other words, you are paying $18,000 to the IRS that could have stayed in your bank account over the next 4 years. Yes, there will be those who say it all works out at the end of the day so why am I bringing this up? Sure, it works out over 15 years but you miss out on the opportunity to keep more of your money working now than bleeding it out over 15 years.
If you made improvements north of about $200,000 in 2024, those should be studied. You should at least have it evaluated. Some of those improvements will be able to take partial asset disposition (PAD). That’s a use it or lose it tax strategy. Pretty much most owners miss out on this deduction. They miss out be they are not engaging nor are their tax advisors and CPAs with cost segregation professionals with every single improvement over $200,000. If I had to guess, I would think that somewhere between 97-98% of all improvements over $200,000 are not studied. And they should be.
If you’re okay paying the IRS $5, $10, $15, $20k more than you need to be, no problem. But if you want to squeeze everything out of your building and improvements that you are lawfully allowed to do, then have me run your project through this calculator to see. Every building owner I talk with tells me that they don’t want to pay any more in taxes than they absolutely have to. So why then are you paying more in taxes than you have to? I also hear a lot of building owners that the wish they got more tax strategy from their tax advisor. Okay, tax advisors, here’s a fantastic, easy, cost-effective and inexpensive way to be strategic for your clients.
Got Tenant Improvements? Let’s run them through my model and see what it spits out.
I’ve built a custom calculator to help figure out if it’s worth it or not to do cost segregation on improvements. It’s very details and gives you some tolerances and ranges so you can see if it’s worth it or not. I’ve played around with it and I can tell you that nearly all these capital improvements, tenant improvements, renovations etc. can benefit from cost segregation.
Below is a brief video I recorded demonstrating this calculator. All CPAs, EAs, and tax advisors should run their client’s projects through this model.
Connect with me on LinkedIn or give me a call. My contact information is below. I’d be happy to discuss your project anywhere in the U.S. I can run your project throught this Tenant Improvements calculator and see what kind of results we might expect. Let’s maximize your tax savings on your building, project, improvements.
REALTORS and Brokers who work with real estate investors should look at adding cost segregation as a service that you and/or your firm offers. It’s a fantastic service for your clients. (Here’s a 12 minute explanation how REALTORS can implement cost segregation into their business today). You’re going to make a lot more in referral fees from cost segregation than you do with your affiliated services for home warranties or insurance. You can earn 10% of the fee. If the study costs $2,500, that’s $250 for you just for referring us. You don’t have to be an expert. Let us handle it. We’ll run with it and pay you when the study is finished and we’ve been paid by the client.
Connect with me and let’s discuss. I work all over the county. I’m also a licensed REALTOR and have been since 2003. I’ve been a broker since 2007. I don’t do much for transactions any longer as my time and commitment is with cost segregation. So I’m here to be your partner. I know how hard you work and the value you try to deliver to your clients. This can and will help.
In the competitive world of commercial real estate (CRE), every advantage counts. As a broker or agent, your goal is not just to help your clients close deals, but to add value that sets you apart from the rest. One underutilized strategy that can enhance client relationships, generate referral fees, and potentially lead to future transactions is cost segregation. This tax-saving tool can transform how your clients view property investments and open the door to significant financial benefits for both of you.
What Is Cost Segregation?
Cost segregation is a tax strategy that allows property owners to accelerate depreciation on specific building components, such as lighting, flooring, or specialized wiring, rather than depreciating the entire property over 39 years. By reclassifying certain assets into shorter depreciation schedules (5, 7, or 15 years), property owners can dramatically increase their tax deductions, often realizing significant tax savings in the first few years of ownership.
These upfront savings enhance cash flow and enable property owners to reinvest in their business or even expand their property portfolio. Given these benefits, cost segregation should be a standard part of your conversation with clients, particularly for those who own or are considering purchasing commercial real estate.
Why CRE Brokers Should Offer Cost Segregation
1. Value-Added Service for Your Clients
Offering cost segregation positions you as more than just a broker; it positions you as a strategic partner invested in your clients’ long-term success. The tax savings that clients can achieve through this strategy are substantial—sometimes as much as 20% to 40% of a property’s purchase price can be reclassified for accelerated depreciation. This kind of savings can lead to increased cash flow, allowing your clients to reinvest in their business, upgrade facilities, or even acquire additional properties.
2. Strengthen Client Relationships
Cost segregation creates an opportunity for brokers to strengthen client relationships by providing a service that has tangible financial benefits. When clients see that you’re proactively looking for ways to save them money, they’re more likely to return to you for future transactions. More importantly, when the savings from cost segregation enable a client to purchase another building, who are they likely to call? The same broker who introduced them to the strategy in the first place.
3. Earn Referral Fees
Not only can offering cost segregation be a value-added service for your clients, but it can also be a direct revenue generator for you. Many brokers are unaware that they can earn a referral fee for recommending a cost segregation study. This additional stream of income can be a nice bonus, especially when paired with the potential for repeat business as clients reinvest their savings into new properties. Also think about this…why leave an opening for your competition to eventually reach out to your customer / client and talk with them about cost segregation. They might wonder why you didn’t say anything about it.
4. Make Clients’ Properties More Attractive to Buyers
For brokers involved in sales transactions, presenting cost segregation as part of the package can make a property more attractive to potential buyers. When buyers understand that they can benefit from accelerated depreciation after purchasing a property, it can make the financial proposition of the deal much more enticing. In essence, you’re not just selling a building; you’re selling a future tax strategy that can significantly boost the buyer’s return on investment. My experience is that about 6 out of 10 building owners have never heard of this before. Many of their CPAs won’t make mention of it either. You should make sure all your clients and prospects know about it.
5. Staying Ahead of the Competition
The commercial real estate market is becoming more competitive, with brokers and agents vying for the attention of property owners and investors. Offering services like cost segregation distinguishes you from the competition by positioning you as a full-service consultant who can bring more to the table than just listings and negotiation skills. This depth of service helps to solidify your expertise in the eyes of clients, giving you an edge in a crowded marketplace. Consider marketing cost segregation as a service you offer – because you do! You just have to offer it!
Cost Segregation and the 2017 Tax Cuts and Jobs Act
The benefits of cost segregation certainly accelerated and became even more attractive since the 2017 Tax Cuts and Jobs Act (TCJA). One of the key provisions is bonus depreciation, which allows property owners to deduct 100% of qualified improvement costs in the year the property is placed in service. The TCJA has a stair step downward each year or bonus deprecation. For properties placed into service after Sept. 27, 2017 and by Dec. 31, 2022, they could take 100% bonus depreciation. (They still can with a lookback study…so if they haven’t done cost segregation, they can still do so). In 2023, bonus went to 80%. In 2024 it’s 60% and it lowers 20% each year until it is zero again in 2027. Congress may vote to extend bonus depreciation but given the way things are in Washington, DC, no one really knows if this is going to happen. Brokers should highlight the current bonus depreciation ability window to clients, stressing that now is the time to act to maximize tax savings.
Practical Steps for Brokers
If you’re a commercial real estate broker interested in offering cost segregation, here are a few steps to get started:
Partner with a Reputable Cost Segregation Firm: Not all cost segregation studies are created equal. Partnering with a firm that employs engineers and tax professionals ensures that your clients will receive a comprehensive and accurate study. Find a great rep who will be professional and responsive to you and your clients.
Educate Your Clients: Many property owners may not be familiar with cost segregation or may not realize it applies to their properties. Take the time to explain the potential benefits and how it could impact their bottom line. This is where your cost segregation partner can come in handy to help with the education. You don’t need to be the expert.
Highlight Potential Savings Early: When discussing potential purchases with clients, make it a habit to mention cost segregation. Highlighting the tax advantages upfront can make the financials of a deal more appealing to buyers. Some brokers also use cost segregation estimates to help them with their listing marketing.
Leverage Success Stories: Share testimonials or case studies from other clients who have benefited from cost segregation. This provides real-world examples of how the strategy can boost cash flow and open doors for further investments. Once you have an owner or two who saves $50, $100, $200k on their income taxes, you’ll become a true believer yourself.
Don’t Forget About Your Own Investments
Remember if you own commercial property or residential investment property, cost segregation can be a huge help to commercial real estate brokers. Discuss this with your own tax advisor, but normally you qualify for as a Real Estate Professional or REP, in the tax code. This means that all of your income is active so if you have real estate and can generate say a $200,000 depreciation expense, that very well might lower your income that year by $200,000 saving you probably $60,000 – $70,000 in income taxes. Might it be worth it for you to spent $4-$7k or so on a cost segregation study? I think so.
Conclusion
In today’s fast-paced commercial real estate environment, brokers need every tool in their arsenal to add value, build strong relationships, and stay ahead of the competition. Cost segregation is one such tool—a tax-saving strategy that not only benefits your clients but can also enhance your business by generating referral fees and encouraging repeat transactions. By offering this service, you position yourself as a forward-thinking, value-driven broker who is committed to maximizing your clients’ financial success.
Now is the time to unlock the hidden value in your clients’ properties and take your real estate practice to the next level. As I like to say, we help squeeze everything out of that property. There’s often money still remaining in many buildings and owners and brokers just are not aware. Let us take a look and see if we can help. There’s never a cost or obiligation to have us run the numbers.
I work all over the U.S. and would be happy to have a conversation with you. I partner with CRE brokers around the country to help them offer this service. I’m backed by a phenomenal company in CSSI. It still blows my mind how few commercial real estate brokers utilize cost segregation as part of their core services offered.
If you own a mobile home park and plan to keep it for the next few years or longer and if you haven’t done cost segregation, you may want to take a look at it. Mobile home parks are profitable so even if this is a passive income stream for you, you likely owe taxes each year because of this investment. If you do cost segregation, you’ll be able to defer taxes for years most likely. I’d be happy to talk with you about it.
I work with a lot of commercial real estate brokers around the country but it’s just a tiny fraction of the number of CRE brokers who should be using cost segregation in their practices. It’s a missed income opportunity for the broker but more importantly it’s a missed opportunity to provide a very powerful value-added service that will have a material positive impact on your commercial real estate client. You also leave yourself exposed that someone else might call them up to make mention of it and start to build a relationship with that client.
As the key point of contact in a transaction and tip of the spear so to speak, commercial brokers work with buyers of commercial real estate to go through the financials, due diligence, market opportunity and pricing of all kinds of buildings. Why not discuss cost segregation with your clients at the same time? It’s a key part of owning commercial real estate. It can help improve an owner’s cash flow, reduce their immediate tax liability and help them have a better understanding of their building. It definitely affects the proforma in a positive way. You don’t need to be the expert. You should have a partner in the business to whom you can connect your client for a no cost, no obligation consultation and estimate.
If you’re a commercial broker and you don’t have a trusted partner for cost segregation, consider giving this short video presentation a watch. It’s 11 minutes long. I provide professional, engineering-based cost segregation services all over the country. Our firm is one of the largest and oldest in the country. We have experience with all properties types and classes in all 50 states. We’ve now successfully completed more than 50,000 studies.
By implementing cost segregation into your commercial real estate practice, you will not only get paid referrals from us, but you will gain new clients and close more deals. It will happen. Everyone’s looking for an edge and I’m telling you, THIS will give you an edge in the marketplace. Give this a watch and then reach out to me for a conversation.
If you go back to my home page, you’ll see a map of many of the properties we have studied in the past couple of years. Under the “Projects Completed” tab on the home page, it has a drop down so you can see pictures of the buildings our team has studied. Many of these projects have come to us by referral from commercial real estate brokers. Some also come to us from CPAs and building inspectors.
Reach if you’d like to talk about this program to incorporate cost segregation into your commercial real estate practice.
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
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.
Tenant Improvements, or TI’s as they are known typically are not studied. If it’s an interior improvement to a building most CPAs will just mark this cost as QIP or Qualified Improvement Property. It has a 15 year class life just like land improvements do. In the world where bonus depreciation was 100%, I could see why they would do this and not study the improvements. I still think there are benefits to studying the improvements even at 100% bonus but I’ll make mention of that in a minute.
But here we are today at 60% bonus depreciation. In 2023, bonus depreciation was 80%. Pretty much all hope has faded at this point that 100% bonus depreciation is coming back in 2024. Speculation is that the new government in 2025 will renew 100% bonus depreciation for 2025 and beyond but no one knows for sure at this point. All we have is 2024 and we sit at 60% bonus depreciation.
When I talk with CRE brokers about TI’s they will often tell me it absolutely makes sense that TI’s have a shorter class life at 15 years because pretty much once those improvements are made for a particular tenant, they are often worthless to the building owner when and if he has to place a new tenant in the space. Usually they have to tear it out or significantly modify the space for the new tenant. So the improvements have zero value essentially. When I talk with GCs who actually build out these TI’s they often say the 5 year class life property often has to be updated anyway in 5 years. It’s often worn out or maybe outdated. If that’s the case, why not identify and reclassify your TI’s so that you can clearly see what is 5 year property?
What is interesting is that if you actually study tenant improvements, the results will often come back with 30, 40, 50, 60% of the work effort being identified as 5 year property. The result usually is QIP…sometimes there ends up being some structural at 39 years. But lets say the 5 year is 50% of the overall improvement? That is significant in terms of depreciation, tax savings, diminished value and recapture tax. After seeing what I’m seeing on many TI projects, I’m really surprised owners don’t have these efforts cost segregated. The reason they don’t have them studied is their CPAs tell them they will just take 60% bonus and identify it all as 15 year. While that is an accepted practice, the owner is leaving depreciation on the table by not breaking out the 5 year. Some will say it’s not worth the cost of the study. To study most Tis is only a few thousand dollars. It absolutely is worth it for the owner to study it.
Given the space limitations here, I’ll do a follow up post at some point with some further details. But TI’s are not unlike the broader issue with commercial property…why would you buy a commercial property which is made up of 5, 15, and 39 year property but leave it all as 39 year property and depreciate it as such? There are on a few circumstance where that makes sense to do so.
Commercial real estate brokers and General Contractors have a real opportunity here to help their clients maximize their tenant improvements and get all the tax benefits they can out of improving their buildings.
I work all over the U.S. If you’d like to have a conversation, please don’t hesitate to reach out to me. You can also follow me on Twitter @costsegbuilding or visit my blog for more detailed information about cost segregation at www.costsegbuilding.com.
