Cost Seg Building

A Blog About Tax Savings for Building Owners

Tag: Cost Segregation (Page 3 of 6)

Retail Strip Centers and Cost Segregation

March 29, 2024 /
Retail Strip Centers or Strip Malls are great candidates for cost segregation

Retail strip centers are a highly sought after asset class for commercial real estate investors. I think part of the reason they are liked is because you typically have anywhere from 4 -15 tenants depending upon the size of the building. This spreads out the risk with the cashflow so that if one or two tenants vacate, it’s usually not a huge burden. This is not the case of course if you have one of the tenants taking up a big part of the space. But normally when that happens, those tenants are on a significant, long-term lease.

Our firm studies lots of of strip malls or retail strip centers. Cost segregation for retail strip centers is an excellent idea for the owners. Besides the big depreciation expense that gets generated and of course if the main thing people hire us for, it’s really helpful to have a breakdown of all of the sytems and components of your buildings. Retail strips, just like other commercial property, require constant upkeep, maintenance and repair. If you have things identified, it then makes it easier to make decisions about expensing vs. capitalizing when it comes to repairs or improvements.

In terms of the study results, normally we see that the 5 year property might be 8-10% of the building cost. Sometimes if the property is dominated by a tenant that might be something like a Dollar-type store, those interiors are pretty sparse by design. Those might end up being 5-7% that get identified as 5 year property. But these properties tend to have ample parking and that’s where the big payoff comes in with cost segregation. It’s not uncommon to see these buildings have 10-20% of their overall cost tied to the land improvements. Land improvements are 15 year class life property and include things like the parking lot, lighting, landscaping, patios, signage etc. Because the way bonus depreciation works, this class life qualifies for it. Bonus Depreciation schedule is noted below.

Bonus Depreciation schedule as of 3/29/24 – subject to change by Congress any minute now as they look to bump bonus depreciation back up to 100% through 2025 but that has not yet been approved.

Buildings in-service date

  • After Sept. 27, 2017 and by Dec. 31, 2022 – 100% bonus depreciation
  • Jan. 1, 2023 – Dec. 31, 2023 – 80%
  • Jan. 1, 2024 – Dec. 31, 2024 – 60%
  • Jan. 1, 2025 – Dec. 31, 2025 – 40%
  • Jan. 1, 2026 – Dec. 31, 2026 – 20%
  • Jan. 1, 2027 – bonus depreciation goes to 0.

If you would like to talk about your building or get a quote for cost segregation, please don’t hesitate to reach out. There’s no cost or obligation. I’m not going to charge you in 15 minute increments to discuss. The consultations are free.

Cost Segregation for Charlotte Commercial Real Estate

March 28, 2024 /

If you own commercial real estate in the Charlotte, NC metro and if you haven’t done a cost segregation study for tax savings, please feel free to reach out and give me a call. I’m based out of Greenville, SC just 90 minutes away. I can work anywhere in the U.S.

Recently we studied this new construction building that is Aspen Dental and Clear Choice Dental Implant Center. These kinds of retail buildings perform very well with cost segregation because they are often built out quite nicely with internal finishes many of which are considered 5 year class life. Also since this was a new developed parcel, given the requirements for parking, the 15 year class life property also is typically quite large and benefits the owners.

As I write this, Congress has not yet officially passed the bill that would allow bonus depreciation to go back to 100%. As things stand today, any properties placed into service in 2023 get 80% bonus depreciation and those placed in-service in 2024 get 60% bonus. That means for all class life property identified as 20 years or less, the owners can take 60% of that cost as a depreciation expense.

John Murphy, CSSI, LLC 864-276-1448 / john.murphy@costsegregationservices.com

Cost Segregation for Dollar General Stores

March 22, 2024 /

I get asked this question quite a bit….is “this – insert building type or address” particular building a good candidate for cost segregation? And so I also hear this with Dollar General Stores. They are pretty basic. Generally if they are stand-alone buildings they are metal buildings with not a lot of finishing. That said, almost every commercial building that is profitable and has enough basis is usually worth studying. Dollar General Stores are no different.

I recently studied a couple of them for an owner recently and the studies turned out great for the owner. Every building is different of course but in general we might see about 5-6% of the cost be identified as 5 year class life and 10-20% identified as 15 year depending upon the size of the parking lot. The two I completed recently had the 15 year land improvements come back at 16 and 18%. That is significant especially given that 15 year can be taken as bonus depreciation. Remember, property eligible for bonus depreciation is those with class lives of 20 years or less. When we do our studies, we identify 5, 7 and 15 year property. For the tax year of 2023, if a building went intok service in this particular year bonus is 80%. (Note: Congress is currently considering revising this to take bonus back up to 100% at least through 2025 is what I’ve read).

Cost Segregation for Real Estate Carolinas Real Estate Investors

December 31, 2023 /

Real estate investors who are buying and holding long term and mid term rental homes should look at doing cost segregation to saving money on income taxes. I do a lot of studies for real estate investors across the country. We are doing a number of them these days for investors in the Upstate of South Carolina as well as in the state of North Carolina. Upstate CREIA and Carolinas Real Estate Investors Assocation are two outstanding investor associations.

If your property has a cost basis of around $200,000 or more and if you are planning to hold the property for at least another 3 years, it’s highly likely you will stand to benefit from doing a cost segregation study.

The costs will generally range from about $2,200 – $3,500 depending up the size and cost basis of your property and whether or not you’ll need to file an IRS Change of Accounting form 3115. The 3115 form is used to let the IRS know you’re moving from straight line to accelerated depreciation. It’s used all the time. In fact I think we draft about a 1,000 of these each year.

But if you own a property, you might end up saving $5,000 – $10,000 after paying for the cost of the study. This works if you’re profitable and having to pay taxes on your rental income, or if you are considered a full time real estate professional. If your expenses and standard depreciation already wipe out your income, then doing a cost segregation study probably doesn’t make sense to do.

Cost Segregation for Commercial Real Estate Brokers

December 29, 2023 /

I get asked to come in and present to commercial real estate brokers, financial advisory firms, CPA firms and occasionally a college might ask me to speak to their accounting students. The the folks who are consistently really interested in learning more about cost segregation are the CRE brokers…as well they should.

This is not only easy money but it’s a great value-add service that you can tell your clients about which in turn might lead to another deal. How so? Let’s say you help a buyer purchase a new building. As part of your due diligence, you get an estimate for cost segregation. It’s likely the owner is not familiar with cost segregation. You might end up saving that owner $30, $50, $100k+ on his/her taxes. It might even be enough that they want to buy another building with you. You can earn a referral fee on business you send our way. Of course it’s nowhere near what you earn with real estate commissions but it all helps at the end of the day. Telling your clients about cost segregation and getting them an estimate is a win-win-win for everybody.

I recorded a presentation that I recently used to help educate many commercial real estate brokers. It’s not meant to be an in-depth study of cost segregation but hopefully provides enough of an overview to help you understand the power of cost segregation and why you should have a trusted source to help you and your clients maximize their building’s cash flow while minimizing the taxes for the owner.

Presentation about Cost Segregation for Commercial Real Estate Brokers
John Murphy Cost Segregation

Will Congress Extend 100% Bonus Depreciation Through 2025?

December 29, 2023 /
100% Bonus Depreciation Commercial Real Estate, Residential Investment Property

Anyone paying attention to Washington DC knows that our elected representatives have not put together a real budget. There is still lots to do when they get back to work 🙂 in early January. One of the things that has been floating around DC is the possible extension of the 100% bonus depreciation rule that was originally put into place by the Tax Cut and Jobs Act of 2017.

Many in commercial real estate and particularly the GPs who run the syndications for multi-family investments have become addicted to the 100% bonus depreciation rule. I like to call it the crack of real estate and tax. In 2023 it has moved to 80% bonus and in 2024 it’s scheduled to drop to 60% bonus depreciation.

Bonus depreciation comes in to play or all property with a class life of 20 years or less. When a cost segregation study is completed, the property that is normally all 39 year if commercial and 27.5 year if multi-family / residential investment, gets reclassified to it’s proper class lives which are 5, 7, 15, and/or 27.5 / 39 years. This allows for a much bigger deduction to be taken early in the life of the ownership of the property.

Cost Segregation Greenville Spartanburg Anderson South Carolina

December 15, 2023 /

If you’re looking for cost segregation services or studies in the Upstate of South Carolina, I can help. I’m based in Greenville and work with many building owners in Greenville, Spartanburg and Anderson to help them with their properties. We have saved owners a small fortune on their income taxes.

Our firm conducts an engineering-based cost segregation study that allows you as the owner to maximize the deductions you might have with your building(s) when it comes to depreciation. Reach out if you’d like a free, no-obligation estimate on what your income tax savings might be if you utilize cost segregation. We can do this on properties if they have been newly acquired as well as those that perhaps you’ve held for a number of years. Call me at 864-276-1448. John Murphy, CSSI.

Industrial Outside Storage – Great Property for Cost Segregation

November 4, 2023 /

Industrial Outside Storage or IOS, is a class of property that has become increasingly popular especially in areas where there is a high concentration of warehouses, trucking and supply chain operations. Generally speaking this is a parcel of land where truck trailers are parked.

These IOS’s generally consist of fencing all around the property and then some kind of parking pad – often gravel of sorts. Nearly all of the improvements are land improvements. There will be a small part of it likely identified as utilities which are 39 year class life.

*Let’s say you buy a 5 acre parcel that already is an IOS and you paid $700,000 for it. Maybe you have a land value of $350,000. The remain $350,000 can be studied in a cost segregation study and get that identified properly. That’s not an expensive study. It might cost about $3,000. It’s likely you’ll end up with 90+% that gets identified as 15 year class life because they are land improvements. In 2023, you can take 80% of that in depreciation right away given the bonus depreciation rules.

If you have a property like this, reach out and we can run the numbers for you.

Cost Segregation Lake Keowee Rentals

November 4, 2023 /
Lake Keowee VRBO with direct lake access and spectactular views

Do you own property on beautiful Lake Keowee in the Upstate of South Carolina? Is it a short-term rental? Long-term rental? Either way, you might benefit by doing cost segregation for tax savings.

I’m based here in the Upstate of South Carolina and work with many owners not only in South Carolina, but across the U.S. to study their investment properties for tax savings that can be the result of applying cost segregation to your properties.

Cost segregation is a tax planning strategy that can be applied to various types of real estate investments, including short-term rental properties. Short-term rentals, such as vacation homes or Airbnb properties, can benefit from cost segregation studies in order to maximize tax deductions and reduce taxable income. Here’s how cost segregation can be applied to short-term rentals:

  1. What is Cost Segregation? Cost segregation is the process of identifying and classifying certain components of a real estate property into shorter depreciation periods for tax purposes. This allows property owners to accelerate their depreciation deductions, which in turn can reduce their taxable income and improve cash flow.
  2. Types of Property Components: Cost segregation typically focuses on reclassifying certain building components from a standard 27.5 or 39-year depreciation period to shorter periods, such as 5, 7, or 15 years. Short-term rental property owners can benefit by reclassifying assets like:
    • Personal property: Furniture, appliances, fixtures, and equipment.
    • Land improvements: Landscaping, outdoor lighting, parking lots, and sidewalks.
    • Tenant improvements: Renovations or improvements made to cater to guests’ needs.
  3. Benefits of Cost Segregation for Short-Term Rentals:
    • Increased depreciation deductions: By reclassifying assets to shorter depreciation periods, property owners can deduct a larger portion of the property’s cost in the early years, reducing their taxable income.
    • Improved cash flow: Higher depreciation deductions mean lower taxes, leading to increased cash flow for the property owner.
    • Enhanced ROI: The upfront tax benefits can significantly improve the return on investment for short-term rental properties.
    • Cost recovery: Cost segregation can uncover previously overlooked deductions, allowing property owners to amend past tax returns and claim retroactive deductions.
  4. Cost Segregation Study: To implement cost segregation for a short-term rental property, property owners typically hire a qualified cost segregation specialist or firm. The specialist will conduct a thorough study, which involves inspecting the property, identifying eligible components, and preparing a detailed report that outlines the reclassified assets and their respective depreciation periods.
  5. IRS Compliance: It’s important to ensure that the cost segregation study is performed in compliance with IRS regulations and guidelines. The IRS provides detailed guidance on cost segregation in its Cost Segregation Audit Techniques Guide.
  6. Documentation: Proper documentation is critical when applying cost segregation to short-term rental properties. Property owners should maintain records related to the cost segregation study, including the study report and any supporting documentation.

While cost segregation can provide significant tax benefits for short-term rental property owners, it’s important to work with tax professionals or specialists who are experienced in this area, as it can be complex and requires expertise to maximize its benefits while staying compliant with tax regulations.

Cost Segregation for Short-Term Rentals

November 4, 2023 /
Stunning mountain Airbnb in Pigeon Forge, TN

Short-term rentals are great candidates for cost segregation. Whether your on the Airbnb, VRBO or some other short-term rental platform, these properties tend to do very well for their owners when it comes to utilizing this tax strategy.

Many of the short-term rentals that I see tend to be nicely finished on the inside and often will have decent land improvements like driveways, patios, outdoor kitchens, docks and extensive landscaping.

How might this work you ask? Let’s say you paid $800,000 for your property that you’ve converted into an Airbnb in 2023. We’ll say the land is $150,000. That leaves you with $650,000 as your basis. (BTW, this math works essentially the same if your Airbnb was 2x as much or 1/2 as much). Of that $650,000, let’s say we identify 20% as 5 year property and 5% as 15 year class life property. That means you can accelerate 25% of the $650,000 or $162,500. In 2023, you can take 80% of that as Bonus Depreciation so you could take a deduction of $130,000. If you made $150,000 in 2023 as your Airbnb income, you could knock that down by $130,000. If you’re at the 32% tax rate, that’s a savings of over $40,000 in income tax savings. A study like this might cost you between $3,500 – $4,000. That’s an expense to you so it nets down to $2,720. Your ROI is about 15:1 or 1,500%.

Owners should always consult with their tax professionals to see if this makes sense for you to do. Feel free to reach out if you’d like to discuss. I’m happy to run a no cost, no obligation analysis / estimate for you. Let’s connect on LinkedIn or find my on Twitter @costsegbuilding.

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