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 Explained for Mobile Home and RV Park owners in 2 minutes. These are great assets for cash flow and the depreciation these parks generates is second only to C-stores and tunnel car washes. It’s not uncommon to see 50-90% of the property get reclassified so it can be accelerated.
What does this mean? Let’s say you purchased an RV Park for $2.5MM and the land is worth $500,000. That leaves you with a cost of $2MM which as it sits is 27.5 year property. But what if you could reclassify 75% of it by doing cost segregation? That’s $1.5MM in property that has been reclassified as either 5 or 15 year property. In 2023 you can take 80% bonus depreciation. So the owner could get a depreciation expense of $1.2MM in year one of owning the property. If he/she took straightline 27.5 year deprecation without cost segregation, the depreciation expense would be a maximum of about $72,000 that first year depending upon when they put it into service.
Remember that cost segregation is based upon cost and not appraised value. If you have a property that you paid $200,000 for 20 years ago and now it’s worth $1.5MM, a study isn’t going to help you much unless you’ve done a ton of improvements along the way. What we are seeing is a number of these parks are either being developed or they are trading hands. Once that happens, the new owners should definitely look at doing cost segregation.
I work all over the U.S. in all 50 states and get calls from all over the place to help with cost segregation not only on these assets but all types of commercial property. I’d be happy to talk with you at no charge and if you’d like our team to run the numbers for you, just let me know. Connect with me on LinkedIn or Twitter.
Everyone thinks about buildings when they think about depreciation and the benefits of cost segregation, but don’t forget about the massive positive impact land improvements can on your depreciation. It’s common that land improvements might be anywhere from 4-15% of your overall building cost or basis. Sometimes we’ll even see 25%+! With 100% bonus depreciation, let’s say you have a $1 million building….if 10% of the building cost is land improvements, you could potentially take a $100,000 deduction in year one of your ownership! That right there would be about a $30,000+ tax savings – i.e. the money stays in your bank account and not the IRS’s.
The IRS classifies land improvements as 15 year class life property. Depending upon the type of property, we will regularly see such land improvements as:
Parking lot / driveway
Parking lot striping and barriers
Sidewalks, patios and curbs
Site drainage
Exterior signage
Landscaping and irrigation
Retaining walls
Security light poles
Exterior fencing
Exterior dining enclosure
Exterior bollards
Dumpster enclosure
Pool
Docks
Site improvements can have a BIG impact on your depreciation and provide a big depreciation expense for building owners when they apply a cost segregation study. Remember the cost segregation study will separate out your property from it all being lumped together as either 39 year (commercial) or 27.5 year (residential investment). Property will be reclassified to 5, 7, 15, and 27.5 / 39 year property. Right now for properties purchased / in-service as of Sept. 28, 2017 – December 31, 2022 can take 100% bonus depreciation. Bonus depreciation is available for property with class lives of less than 20 years…so all your 5, 7 and 15 year property could be depreciated in year 1 of your ownership. That can provide a significant tax savings for owners. Depending upon the building, you might be able to immediately depreciate 10-30% of the overall building cost or basis.
For those who want to grind harder on the topic, here’s the official link to the IRS on how to depreciation property. It’s a comprehensive list on all types of property and class lives. Otherwise, if you’d like to talk with me about seeing if your property might be a good fit for cost segregation, please don’t hesitate to reach out. My information is available under the Contact tab above or connect with me on LinkedIn.
As always, please consult with your own tax advisor for your specific situation to see if a cost segregation study might be beneficial to you.
