Cost Seg Building

A Blog About Tax Savings for Building Owners

Tag: Tax Benefits

Maximize Your Tax Savings Why Building Improvements in 2024 Should Be Cost Segregated

November 7, 2024 / / 0 Comments

**Maximizing Your Tax Savings on Building Improvements** 

Let’s talk briefly about the tax benefits you might be missing out on with your building when spending money for tenant or capital improvements. If you did a $375,000 tenant improvement or capital improvement to your commercial building in 2024 and are not doing cost segregation, you’re likely overpaying your income taxes by $10,000 to $15,000 over the next five years.

Today, most of these improvements go unstudied, leaving building owners with significant, unclaimed tax savings. Typically, CPAs will record improvements as “qualified improvement property” (QIP) with a 15-year class life, which allows for 60% bonus depreciation. While that’s within the tax code, this approach often overlooks substantial five-year property within the improvements, which could yield faster and more significant tax deductions.

**Why a Study Makes Sense** 

When improvements are carefully studied, a sizable portion (15–50%) can often qualify as five-year property. For example, a $375,000 improvement could yield 30-40% in five-year property. Without a study, you miss the opportunity to accelerate your deductions and enhance your cash flow.

Consider this example: 

– If a study costs around $3,500, your net tax savings start showing by year two. By year five, you could be ahead by $10,000 or more.

– Even with a conservative outcome of 25% five-year property, your savings could be around $6,000 over five years; at 50%, you might save $15,000.

These are potential savings you’re leaving behind if you simply default to the QIP classification without a study.

**Optimize Your Investments** 

This isn’t just about tax savings; it’s about making the most of every dollar you invest in your property. Those savings could fund more improvements, support business growth, or even personal goals.

**Let’s Get Started** 

I’m John Murphy with CSSI. I’ve developed a custom calculator to help building owners and CPAs understand the real potential of cost segregation on improvements. I work nationwide, and with our network, I can handle projects in all 50 states efficiently, without incurring travel costs. So while I’m in the Southeast, I can study buildings across the rest of the country and it does not cost you more money. If you did improvements in 2024 that were more than $200,000, call me for a conversation. There’s no cost or obligation. I can run the numbers for you and you can see how this might help you.

Let me ask you this…and I don’t care how much money you have…if you knew that there was $10,000 that could be in your bank account over the next few years but instead is sitting there in the government’s IRS accounts, wouldn’t you want your money?

Learn more on my blog at www.costsegbuilding.com, and connect with me on LinkedIn or social @costsegbuilding. Let’s discuss how a study could benefit your next project and help you maximize your building’s tax efficiency.

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

Are You Overpaying the IRS? The Case for Cost Segregation on Tenant Improvements

September 26, 2024 /

Should you do cost segregation on tenant improvements? Most tax advisors and CPAs don’t bother. They just call it QIP (qualified improvement property) which gets a 15 year class life. If it’s 80% bonus as it was in 2023, they just claim 80% in year 1. If it’s in 2024, then it’s 60% and they take 60% bonus in year 1. But did you know that more often then not, the owner of those tenant improvements is paying more money in taxes than they need to be?

If you consider that with a lot of improvements, the 5 year class life will be 25 – 45% of the overall improvement, then it means there’s still more to squeeze out. Consider this scenario…$400,000 tenant improvement. Let’s say that 35% of that would get identified as 5 year class life. If it goes into service in 2024, the tax advisor or CPA is going to take 60% of $400,000 or $240,000 in year one for the deduction. However, $160,000 in depreciation remains and that will be deducted over the next 14 years. But in that $160,000, we said 35% is 5 year class life. 35% of $160,000 is $56,000. So you might now have $56,000 that you could have taken over the next 4 years now lumped together with the 15 year QIP and it gets spread out over 14 more years. For those keeping track, a $56,000 tax deduction at a 32% tax rate is about $18,000 in taxes. So in other words, you are paying $18,000 to the IRS that could have stayed in your bank account over the next 4 years. Yes, there will be those who say it all works out at the end of the day so why am I bringing this up? Sure, it works out over 15 years but you miss out on the opportunity to keep more of your money working now than bleeding it out over 15 years.

If you made improvements north of about $200,000 in 2024, those should be studied. You should at least have it evaluated. Some of those improvements will be able to take partial asset disposition (PAD). That’s a use it or lose it tax strategy. Pretty much most owners miss out on this deduction. They miss out be they are not engaging nor are their tax advisors and CPAs with cost segregation professionals with every single improvement over $200,000. If I had to guess, I would think that somewhere between 97-98% of all improvements over $200,000 are not studied. And they should be.

If you’re okay paying the IRS $5, $10, $15, $20k more than you need to be, no problem. But if you want to squeeze everything out of your building and improvements that you are lawfully allowed to do, then have me run your project through this calculator to see. Every building owner I talk with tells me that they don’t want to pay any more in taxes than they absolutely have to. So why then are you paying more in taxes than you have to? I also hear a lot of building owners that the wish they got more tax strategy from their tax advisor. Okay, tax advisors, here’s a fantastic, easy, cost-effective and inexpensive way to be strategic for your clients.

Got Tenant Improvements? Let’s run them through my model and see what it spits out.

I’ve built a custom calculator to help figure out if it’s worth it or not to do cost segregation on improvements. It’s very details and gives you some tolerances and ranges so you can see if it’s worth it or not. I’ve played around with it and I can tell you that nearly all these capital improvements, tenant improvements, renovations etc. can benefit from cost segregation.

Below is a brief video I recorded demonstrating this calculator. All CPAs, EAs, and tax advisors should run their client’s projects through this model.

Connect with me on LinkedIn or give me a call. My contact information is below. I’d be happy to discuss your project anywhere in the U.S. I can run your project throught this Tenant Improvements calculator and see what kind of results we might expect. Let’s maximize your tax savings on your building, project, improvements.

John Murphy CSSI

Mobile Home Parks and Cost Segregation

August 21, 2024 /

If you own a mobile home park and plan to keep it for the next few years or longer and if you haven’t done cost segregation, you may want to take a look at it. Mobile home parks are profitable so even if this is a passive income stream for you, you likely owe taxes each year because of this investment. If you do cost segregation, you’ll be able to defer taxes for years most likely. I’d be happy to talk with you about it.

How Cost Segregation on a Step-Up in Basis Can Benefit Heirs and Surviving Spouses

August 15, 2024 /

Step-up in Basis – we’ve all heard this term but I suspect people are missing out on an opportunity when someone who has an ownership stake in a building dies and his/her interests passes to the rightful heir or spouse in many cases.

I’ve mentioned before that if an owner dies and if there is still decent depreciable basis remaining in the buildings he/she owns, the CPA or tax attorney or executor hopefully are aware enough to inquire about getting a cost segregation study done on that buildings or buildings before the estate files the final tax return. This is a sweet deal for the heirs and might put an extra $10k, $50k, $100k in their pockets instead of going to the IRS.

But what about when a married couple owns investment property or commercial property together and one of them dies. Let’s look at an example. (And with all of this, I’m not a CPA nor an attorney… if you find yourself in this situation, you will need to seek your own tax and legal advice. Some states may have different rules as to how this is applied).

Couple purchased a commercial building 20 years ago for $1,000,000. One of the spouses dies. An appraisal is done and it’s worth is now $3,000,000. The surviving spouse gets a step-up in basis. In this case they get 50% of the appreciated value and the initial purchase price. So the step-up is $1,500,000. Because they have owned this property for 20 years, they had depreciated it already by 50% and it’s likely quite profitable at this point. The surviving spouse can do a cost segregation study on that new step-up in basis and likely save a significant amount on their taxes. Just for simple math, let’s say 20% of it can be accelerated…that’s $300,000 depreciation deduction that they could take based upon studying the step-up.

If you live in one of the community property states, I understand that it might be that once one spouse dies, all of their property gets a step up in basis – check with your tax advisor on that one.
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Green Zip Tape – Maximize Tax Savings on Commercial Development

May 23, 2024 /

Building Product with special tax status that few know of yet. Green Zip Tape is something every commercial developer should be considering to lower taxes, increase cash flow while being environmentally friendly.

For example…let’s take a $50MM project. They could see an additional $5MM move from 27.5 / 39 year class life to 5 year by using GZT. That’s nearly a $2MM income tax savings over 5 years. The tax benefits of building with GZT transfer to the new owner. This will be helpful in marketing the property. On top of that you’ll have those who are just thrilled about the sustainabilty / green building components of your building. The cost is a fraction of the benefit.

The IRS gives Green Zip Tape a special tax status because it helps eliminate sheetrock ending up in the land fills when owners need to renovate. The patented technology in the tape allow is to be removed easily from the sheetrock without causing a bunch of damage. The sheetrock panets can then be removed and reused so you end up with removable panels at a fraction of the cost. And you get the tax benefits! It’s genious!

Let us take a look at your project and show you the numbers. In today’s world, an additional 2-3% can make all the difference in the world. Were talking 5-10+% of your construction costs. It’s a game changer.
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Unlocking Tax Savings: How Commercial Property Owners Can Benefit from Partial Asset Disposition During Renovations

May 8, 2024 /


Partial Asset Disposition (PAD) is a tax strategy that can be highly beneficial for commercial property owners, especially during renovations or upgrades. Essentially, PAD allows property owners to decrease their taxable income by writing down the depreciable basis of certain assets that are removed and disposed of during property renovations.

When a commercial property undergoes renovations, certain existing assets may need to be removed—anything from lighting fixtures and HVAC units to doors, windows, and even structural elements like roofing. Under PAD, the cost of these removed items, including the expenses associated with their removal and disposal, can be written down. This write-down provides an immediate tax deduction for the property owner in the year the renovation occurs. It’s crucial to note that this is a time-sensitive opportunity: if the write-down is not applied in the tax year during which the renovation happens, the chance for that deduction is permanently lost. It’s a use it or lose it tax deduction.

The benefits of implementing PAD extend beyond immediate tax relief. At the time of sale of the property, PAD can lead to permanent tax savings by reducing the overall basis of the building, thereby decreasing recapture tax on property that is no longer part of the property.

This strategy is particularly relevant for a range of commercial property owners, including:

  • Retail lessors who might acquire assets left behind by tenants.
  • Property owners undertaking significant renovations, repairs, or improvements in areas such as roofing, lighting, parking lot resurfacing, door and window replacement, floor resurfacing, and both interior and exterior painting, where costs exceed $50,000.
  • Owners who have demolished parts of a facility as part of an improvement or renovation project with costs over $50,000.
  • Those who have acquired, constructed, or expanded facilities since 2000.
  • Businesses that have recently upgraded or replaced major operational equipment within the tax year.
  • Pass-through entities that may be considering a sale soon, especially if there has been significant appreciation in the value of their facilities or operational assets.

The IRS’s final tangible property regulations under Section 263(a) offer comprehensive guidelines on how these assets should be handled for tax purposes. Tax professionals are encouraged to guide their clients in making an annual election to claim these deductions, ensuring that they do not miss out on substantial tax benefits.

To accurately assess and claim these deductions, conducting an engineering-based cost study is advisable. This approach provides tax professionals with precise, defendable calculations that can be directly applied to a client’s tax returns, maximizing the potential benefits of PAD. This detailed evaluation not only supports the claim but also ensures compliance with tax laws, making the deduction process smooth and justified. As always, be sure to consult with your own tax advisor.

Will Congress Vote to Extend 100% Bonus Depreciation Through 2025?

April 11, 2024 /
Photo: Politico

Many of us thought this was a done deal. In fact, I had thought for some time that Congress would extend 100% bonus depreciation. Part of me thinks they might eventually make it permanent as part of the tax code but there are many in Congress who like to have things like this to negotiate for other deals. If that’s the case, they probably won’t make this permanent.

The House of Representatives passed their bill about 10 weeks ago now. The Senate is still sitting on the Tax Relief for American Families and Workers Act. With all the wrangling going on over Ukraine, Israel and US border funding, things seems to be stuck in the Senate.

I’m so focused on commercial real estate that it hasn’t really dawned on me how this bill impacts other industries. Apparently this is a very big deal for American farmers and they also want this passed.

PWC has a good explanation of what’s in the bill that the House had passed at the end of January.

Here’s the Senate Finance Summary. It’s a 9 page PDF will lots of key details.

Most building owners who I know have opted, as they normally do, to extend their tax returns. This year it’s beneficial so they can see if they might end up getting a nice bump from 80% to 100% for their 2023 tax returns.

When Should You Do a Cost Segregation Study?

September 4, 2022 /

This question comes up a lot. Normally the best time to do a study is right at the time of purchase or when it is placed in service. It will allow the owner to maximize the accelerated depreciation available to him/her. Having a cost segregation study done that includes the defining of the key building systems will prove helpful for building owners to stay in compliance with the Tangible Property Regulations that went in to effect in 2014. But the truth is an owner can do it almost at any point in time of their ownership. You will want to get an estimate and if you’ve owned the building for some time, we’ll need to review your depreciation schedule to see if there is any an opportunity for you to benefit from accelerated or catch up depreciation. Remember, most building owners see an income tax savings of between $30,000 – $70,000 per $1 million in building costs (basis).

If you end up waiting a year or more from the time you purchased the property or put it in to service, you will have to file an IRS form 3115. It’s a change of accounting form that gets used for a lot of purposes. It gets filed all the time so there’s no worry to think just because one of these needs to be filed that you’ll open yourself up for audit. We have not seen that to be the case. The form is a bit complicated. The firm I represent will produce a draft of the 3115 and calculate the negative 481a adustment for $750 and then the building owner’s CPA would sign off on it. If the CPA won’t sign off, then we will for another $500. Most CPAs like the fact that we take care of the 3115. This isn’t a huge expense but it does add to the overall cost of a study. Let’s say your study costs are $4-$5k. The 3115 is going to add about 15-20% to the overall cost. Again, not a big deal but you just need to be aware of this.

What if you can’t use all the accelerated depreciation in the year you have the study done? Well, you can carry the loss forward and put that to use unlil that loss is consumed. I have seen many times where owners don’t have to pay income taxes on their property income for 2, 3, 4+ years or more sometimes because of the accumulated accelerated depreciation that was generated from a cost segregation study. I cannot give tax advise. I’m just sharing what we’ve seen other building owners and investors do. Please consult with your tax advisor when considering doing a cost segregation study and whether or not you can benefit from it.

Want to talk about it? Reach out and I’m happy to have a discussion and can provide you with an estimate.

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