Tag: Cost Segregation (Page 2 of 7)

Maximizing Tax Savings: The Overlooked Benefits of Cost Segregation for Tenant Improvements

July 8, 2024 / John Murphy

Tenant Improvements and Cost Segregation

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 It’s often worn out or maybe outdated.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.

#tenantimprovements #Tis #renovations #commercialrealestate #CRE #brokers #CREbrokers #GCs #generalcontractors #buildingowners #CPAs #taxsavings #taxbenefits #depreciation #bonusdepreciation #accelerateddepreciation #recapturetax

Are Short-Term Rentals Considered 27.5 Year or 39 Year Property for Depreciation?

May 15, 2024 / John Murphy

Had a couple of conversations this past week as well as reviewed some depreciation schedules and more often than you would think, we see schedules that have the Airbnb or VRBO (STR) listed as a 27.5 year asset. It’s not. It’s considered more like commercial and gets treated as such. So, short-term rentals like Airbnbs and VRBOs are 39 year assets. Keep that in mind as you are forecasting your depreciation.

Should you study your short-term rental? Well, that depends. Are you going to hold it for at least a few more years? Is it profitable? If it’s not profitable, are you managing the property so that you might be able to utilize the depreciation to offset your other income? Be sure to discuss this with your tax advisor. We can always run the numbers for you but then you need to consult with your own advisors to see if it makes sense to do a study. No need for you to spend $2,500 – $5,500 or so to get a study done only to find out you really can’t use the depreciation. That said, we study a lot of Airbnbs and VRBOs. The cost is not a lot of money for the tax benefits you receive. Many owners see a 10x return on their investment in the study.

Reach out to me if you’d like to discuss. Feel free to also check out the other site I’m building over at Cost Seg Estimate.

The Tax Benefits of Cost Segregation for Short-Term Rentals Airbnb and VRBO

May 15, 2024 / John Murphy

Do you operate a short-term rental such as an Airbnb or VRBO? Is it profitable? I.e. are you having to pay income taxes because you are turning a nice profit on your STR? In this blog post, we’ll explore what cost segregation is, how it works, and the benefits it can offer to Airbnb and VRBO owners.

What is Cost Segregation?

Cost segregation is a tax planning strategy that allows property owners to accelerate depreciation deductions by reclassifying certain property-related expenditures. Instead of depreciating the entire property over the standard 27.5 or 39 years (for residential and commercial properties, respectively), cost segregation identifies and reclassifies specific components of the property into shorter depreciation periods (5, 7, or 15 years). These components can include items like landscaping, fixtures, and certain building improvements. BTW, short-term rentals are considered 39 year property.

How Does Cost Segregation Work?

A cost segregation study is typically conducted by a team of professionals, including engineers, architects, and tax advisors. They analyze the property in detail to identify which parts of the property can be reclassified for accelerated depreciation. The study involves:

Reviewing Architectural Plans and Costs: Examining blueprints, invoices, and other documentation to identify qualifying assets.
Site Visit: Conducting an on-site inspection to verify and document the assets.
Reclassification: Reclassifying the property components into appropriate depreciation categories.
Report Generation: Providing a detailed report that outlines the reclassified assets and their depreciation schedules.

Benefits of Cost Segregation for Airbnb and VRBO Owners

Increased Cash Flow: By accelerating depreciation, property owners can significantly reduce their taxable income in the early years of ownership. This reduction translates to increased cash flow, which can be reinvested into the property or used to expand the rental business.
Tax Deferral: Accelerated depreciation provides a deferral of tax liabilities. By reducing taxable income now, owners can take advantage of the time value of money, allowing them to utilize funds that would otherwise be paid in taxes for other investments or property improvements.
Enhanced Property Value: Reinvesting the tax savings into property improvements can enhance the property’s value, making it more attractive to potential renters. Upgraded properties can command higher rental rates and improve occupancy rates, further boosting income.
Improved Competitive Edge: The savings from cost segregation can be used to offer competitive pricing or to enhance amenities and services, making the property more appealing compared to other listings in the area.
Compliance with Tax Laws: Cost segregation is an IRS-approved method of accelerating depreciation. By conducting a professional cost segregation study, property owners ensure they are in compliance with tax laws while maximizing their deductions.
Flexibility in Planning: The insights gained from a cost segregation study can aid in future tax planning and financial decision-making. Knowing the detailed breakdown of property components and their depreciation schedules allows for better forecasting and budgeting.

Is Cost Segregation Right for You?

While cost segregation offers significant benefits, it may not be suitable for every property owner. One of the things we often will say is that if the owner is planning to hold the property for at least 3 more years, cost segregation will often make sense. If you’re going to hold shorter than that, then it probably doesn’t make sense. We always recommend you consult with your own tax advisor when it comes to cost segregation. The initial cost of the study and the complexity of the property are important considerations. Typically, properties with a cost basis of $200,000 or more are candidates for cost segregation. The more expensive the property, the better the results will be with cost segregation. Depending upon the size, cost and complexity of the property, these studies can often range from about $2,500 to $5,500.

Conclusion

Cost segregation is a powerful tool that can unlock substantial tax savings and enhance the profitability of short-term rental properties on platforms like Airbnb and VRBO. By accelerating depreciation, property owners can increase cash flow, defer taxes, and reinvest in their properties to gain a competitive edge. If you own a short-term rental property, it’s worth exploring whether cost segregation can help you maximize your investment and take your rental business to the next level.

Cost Segregation Example on a $2 Million Commercial Building

May 3, 2024 / John Murphy

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#costsegregation hashtag#commercialrealestate hashtag#commercialrealestatebrokers hashtag#CRE

Commercial Real Estate Brokers and Owners – Slash Your 2023 Tax Bill with Cost Segregation!

May 2, 2024 / John Murphy

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.

#costsegregation #commercialbuildings #CRE #CREbrokers #commercialbrokers #commercialrealestate #buildingowners #residentialinvestment #investments #income #incometaxes #2023taxes #taxliability #cashflow #cssi #johnmurphycostseg #costsegbuilding #taxbenefits #buildings #taxsavings

Extended Tax Returns – Still Time to Do a Cost Segregation Study

April 16, 2024 / John Murphy

Another April 15th tax deadline has passed. Tax professionals everywhere will finally start to come up for air after having their heads down cranking out tax returns and supporting documentation. Many building owners extend their taxes and are looking for their tax advisors to review their cost segregation estimates to decide if they should move forward. I’m already starting to see the dam break meaning some CPAs are starting to respond again :).

If you extended your tax returns, you now have 6 months to get them completed. Actually corporate returns are due Sept. 15th and personal returns due Oct. 15th. If you have a building and are considering cost segregation, let’s connect and have our team run the numbers for you. There’s plenty of time to get these done. Most studies take about 4-6 weeks to get completed from the time we have all the documentation into our study team. There’s no cost or obligation for us to run the numbers for you. Give me a call – John Murphy 864-276-1448.

Align Capital Partners Launches Professional Services Offerings

April 11, 2024 / John Murphy

Align Capital Partners announces acquisition in the tax space of CSSI – Cost Segregation Services, LLC and TaxIncennovations. It’s a growing professional services offering with cost segregation, 179D energy savings and Research & Development tax credits.

As a rep for CSSI I can say that Align Capital Partners has brought some good change to the company. We are more responsive and getting more systematized for scale. I’m looking forward to the growth ahead.

Cost Segregation Presentation and Training for Commercial Real Estate Brokers

April 11, 2024 / John Murphy

Photo: SVN Blackstream Greenville, SC – John Murphy presenting cost segregation to CRE brokers

One of the things I enjoy about the work I do is getting an opportunity to speak with commercial real estate brokers. I can do this for residential brokers as well as they will often be working with investors or they might be buying their own property.

If you work at either a residential or commercial real estate brokerage and are looking for a speaker for your meetings, I’d be happy to come in and speak as long as you’re within a reasonable driving distance for me. I’m based in Greenville, SC so I certainly anything here in the Upstate is accessible. Also, the Charlotte metro and Columbia are only 90 minutes away.

Here’s a presentation I recorded to help commercial real estate brokers understand cost segregation.

Connect with me on LinkedIn or follow me on Twitter @costsegbuilding.

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

April 10, 2024 / John Murphy

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

Maximizing Property Profitability: The Overlooked Tax Strategies Every Property Manager Should Know

April 10, 2024 / John Murphy

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