Recently we completed a cost segregation study for the owner of this retail strip center. I thought it might be helpful for you to see the kinds of results with this kind of asset. (Please note that every building is different and will see a different result…some will perform better than others depending on items like finishings and land improvements like parking lots and landscaping). The owner acquired the building in April 2022. For cost segregation, we deduct the value of the land to come up with the basis or the cost of the building. The basis was $1,125,000. The owner had also spent $125,000 on tenant improvements (TI) which were all interior improvements. Because he had purchased the building in April 2022, he would have had a depreciation expense of $18,750. That is straight line depreciation at 39 years. He also could have taken the $125,000 as a depreciation expense without our help as those tenant improvements are considered Qualified Improvement Property (QIP) which has a 15 year class life. Remember in 2022, we had 100% bonus depreciation for any class life under 20 years so the TI’s could be take at 100% depreciation expense. So he could have potentially had a total depreciation expense in 2022 of $143,750. But he ended up with a significantly larger depreciation expense since he did a cost segregation study. The results were as follows:
Basis: $1,125,000
5 Year: $62,247.71 / 5.5%
15 Year: $124,021.77 / 11.0%
39 Year: $938,730.52 / 83.5%
In 2022, any class life under 20 years can be taken as 100% bonus depreciation meaning you can depreciate the entire asset in year one rather than waiting 5 or 15 years. (Starting in 2023, bonus depreciation goes to 80% and then drops 20% each of the following years until it’s zeroed out in 2027 unless Congress changes the law). In this owner’s case, he was able to accelerate or fully depreciate $186,269.48 in year one because of the cost segregation. That combined with the QIP provides a depreciation expense of $311,555.14 in year one. At a 32% tax rate this would equate to a potential tax savings of $100,000. A study like this generally costs less than $5,500-$6,000. It takes 6-8 weeks to complete and the owner and his/her CPA get a complete breakdown in an easy to use format to apply to the owner’ taxes.
Below is the cost detail on this retail strip center.
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