Cost Seg Building

A Blog About Tax Savings for Building Owners

Tag: Industrial Real Estate

Cost Segregation for Small Industrial Buildings

April 4, 2024 /
Photo Credit: John Murphy, Cost Seg Building

Got a call the other day from commercial real estate broker who was wondering if it made sense to study small industrial buildings. There are lots of 5,000 to 10,000 SF office warehouses scattered throughout the country. We study these all the time and they are beneficial for the owners.

Let’s say an owner buys an 8,000 SF office warehouse. It doesn’t really matter what year it was built but there are lots of these still out there from the 1980’s let say. Typically they don’t have a lot of 5 year property typically associated with office space build out, but they do often have a lot of 15 year class life property which would be the land improvements – parking lots, driveways etc.

In this case, let’s say the office warehouse cost $600,000 and went into service July 1st. It’s estimated that the land us worth $75,000. That leaves $525,000 for the cost basis to be studied. Normal depreciation is spread out over 39 years so it would be $525,000 / 39 = $13,461 per year. Since this went into service on 7-1, the owner would be entitled to half the year’s depreciation or $6,730.

But let’s say the owner decides to do a cost segregation study and have it applied to his taxes. If it turns once the building is studied that 5% of the property is 5 year and 12% is 15 year property that ends up being a significant depreciation expense. (Note: every building is different).

Depreciation:

  • 5 year class life = 5% or $26,250
  • 15 year class life = 12% or $63,000
  • Total Depreciation: $89,250

In this particular situation, the owner will be able to take 13x more depreciation than he would have had he not done cost segregation. This is provided the building qualifies for 100% bonus depreciation. Let’s also figure that this owner is an owner operator and owns his operating business as well as the real estate. He can use the depreciation to offset his operating entities income. This can be done if he “groups” his building and operating entities together in the first year he files taxes for the building. Be sure to consult with your tax advisor on this.

The depreciation of $89,250 multiplied by the owner’s tax rate (let’s say 32%) equals a tax savings of $28,560. That’s real money. The study will cost a fraction of this. It’s an awesome return.

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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.

What Kinds of Properties are Good for Cost Segregation?

September 1, 2023 /

What kinds of properties are good for cost segregation? I get asked this a lot especially as I introduce the concept of cost segregation to commercial real estate brokers. The fact of the matter is, cost segregation works on any and all properties where the owner is receiving a rent or lease payment. With the firm I represent, we generally add one more qualifier and say that the basis or cost needs to be about $200,000 for it to make sense to study. And the reason for that is the minimum study will cost about $2,000 and if you have a $200,000 building – maybe an SFR – you might see a depreciation expense of $30,000 – $40,000. If you’re at the 24% income tax rate, that’s a tax savings of $7,200 or so. Sometimes we still do studies down to about $150,000 in cost basis and it’s still a benefit for the owner.

Cost segregation works on all kinds of property:

  • Industrial
  • Manufacturing
  • Warehouse
  • Office Warehouse
  • Self Storage
  • Cold Storage
  • Office
  • Retail Strip Centers
  • Strip Malls
  • Restaurants
  • Fast Food Restaurants
  • Auto Repair Shops
  • Hotels / Motels
  • Apartment Buildings
  • Rental property – SFRs, Condos, Townhouses
  • Short-term rentals – Aibnb, VRBO
  • Gyms, Athletic and Fitness Centers

Determining if cost segregation is right for you is a fairly straight forward endeavor. You will always want to consult with your tax advisor about your particular situation. It really just becomes a math issue. You get an estimate from me and then discuss with your tax advisor. Does it make economic sense or not. It’s also not as expensive as you might have been led to believe. For most of our clients it is not a big set back and they typically see 10-20x return on the investment with us. That’s 1,000 – 2,000% return on your investment. It’s generally a no-brainer.

Upstate Shines: Spartanburg and Greenville-Anderson-Mauldin take Top Honors in Site Selection Magazine’s Top Metros of 2022

March 13, 2023 /

The Upstate of South Carolina continues to be a top area in the U.S. for site selection for companies not only in the U.S. but around the world. Greenville, Mauldin, Anderson and Spartanburg continue to be at the top of the list for many companies. It’s a great area to live and do business and the location in between Charlotte (1.5 hours) and Atlanta ( about 2.5 hours) away make it a great location especially for transportation. On top of that, it’s a beautiful area. Check out what the Upstate SC Alliance had to say on LinkedIn.

Lee & Associates Greenville / Spartanburg Signs 13 Deals in December 2023

January 16, 2023 /
Photo Credit: Lee & Associates Greenville / Spartanburg

A sign that business continues to keep chugging along here in the Upstate of South Carolina, Lee & Associates Greenville / Spartanburg, announced that their brokers signed 13 industrial and land deals during the month of December 2022. While business might be slowing, there is still a decent amount of activity that is continuing. Lee & Associates Greenville / Spartanburg

The Upstate of South Carolina continues to attract investment from all across the country and more and more people come to realize that the cost of living as well as land and building costs are less here than in most places across the country. The proximity to Charlotte, NC as well as Atlanta, GA are a big help. I-85 runs through Greenville and provides great transportation access to the south as well as cities further up on the east coast. The Inland Port Greer is also a massive business driver helping companies with their supply chains as it has direct access to the Port of Charleston.

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