Cost Segregation Study
Cost Segregation Services, Inc performs an affordable engineering-based cost segregation study on your property. The study accelerates the depreciation of your building/renovation components into shorter depreciation categories such as 5-, 7- and 15-year rather than conventional 27.5- and 39.5- year schedules. 5- and 7- year items might include decorative building elements, electrical for dedicated computer equipment and carpet. Fifteen year items might include site utilities, landscaping and paving. This study results in a much higher depreciation expense and significantly reduced taxable income for the property owner. Your cash flow will increase $60,000 to $100,000 for every $1,000,000 of building cost. Cost segregation can be applied to categories of buildings purchased or built since 1986 including renovations without the need to amend your tax returns.
2014 Tangible Property Regulations Overview
One of the largest changes to tax code since 1986 was passed in 2015 that directly affects real estate owners and investors are the Tangible Property Regulations (TPRs), under code section 263a (1-3). The regulations put all the past court cases and past regulations into one single code.
Many owners and investors are not aware of this regulation. It is very advantageous for the building owner or investor to write down as many repairs as possible. This is because they not only receive a one-time expense of the entire expenditure but will also have reduced capital gains upon the sale of the building.
The amazing opportunity is under code section 481a. Your existing depreciation schedule must be scrubbed. If past expenditures are being depreciation now that, based on the regulations, would not be depreciated today, they can be expensed in the current year.
Moving forward, there are new capitalization criteria and three safe harbors that can be utilized to expense expenditures that would normally be capitalized. You and your CPA can utilize these safe harbors to strategize about how and when repairs should be made.
1) The de minimus safe harbor limit which all businesses can take advantage of. Any expenditure under $2,500 can be expensed.
2) Expenditures deemed repair and maintenance, not a betterment, can be expensed.
3) The small taxpayer safe harbor is an excellent opportunity for commercial and income property owners. Owners would take 2% of the unadjusted basis of each building and write down expenditures under 2% of that number.
Compliance with these regulations can have positive implications for owners and lessees both going backward and moving forward. Being compliant can create a permanent tax deduction right now.
Partial Asset Disposition (PAD)
A PAD allows a building owner to write down the remaining depreciable basis of items removed during a renovation, as well as the costs for the removal and disposal of those items. Did you know that your clients who own commercial buildings and have completed renovations in 2019 can receive a tax deduction from this “use it or lose it” opportunity? Failure to write down the remaining basis in the tax year the renovation was performed will permanently negate the opportunity. A partial asset disposition will also yield a permanent tax savings at the time of sale by reducing the building basis.