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.
Tag: Tax Benefits
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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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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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.
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.
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.