Savannah, GA is one of the fastest growing areas in the country and commercial real estate is benefiting from that growth. The Port of Savannah is a huge driver of the growth and particularly industrial real estate as demand for warehouses grows.
I love Savannah! It’s a beautiful, historic Southern city that has such a great mix of new and old. Many buildings are being renovated and many others are being torn down and new ones going up. If you own commercial real estate in and around Savannah, GA and you want to discuss cost segregation, please reach out and I’d be happy to talk.
Regularly I get questions from CPAs, tax advisors, CRE brokers and building owners if a particular building is good for cost segregation. The fact of the matter is, most buildings with a basis north of $200,000 can generate a nice result with cost segregation. It will depend upon whether or not the owner can benefit from the increased accumulated depreciation expense our studies generate. We always encourage owners to consult their tax advisor before moving ahead with a cost segregation study.
In the video below, I run through some examples of recent sales and plugging in the asset details into our Cost Seg Calculator to see what kind of results might be expected from a cost segregation study.
I talk with lots of tax advisors and building owners as you can imaging. Despite cost segregation becoming more commonplace these days especially with commercial real estate, there still remains lots of misconceptions about it. I recorded a short discussion about some of the big point.
This is a phrase I hear regularly from both building owners and CPAs. When I hear it from building owners, it’s usually something that they picked up from their CPA. The topic might have come up and then the tax advisor says, “I’m not sure it’s worth it” when it comes to doing a cost segregation study.
This just came up recently on a $3MM industrial building we studied. They weren’t sure if it was worth it because of this specific building. The owner was able to take a $300,000 deduction this year because of doing a study. That’s well over $100k in income tax savings and yet prior to getting an estimate from me, they weren’t sure if it would be worth it or not.
We can study buildings with a basis as low as about $200,000 and still make it work for the owner. Almost every building is worth it if there is some basis. Sometimes it becomes a challenge with some 1031 exchange buildings and if you are planning to sell the building shortly. But if you are going to hold it for at least the next 2-3 years, it often makes a lot of sense to do a study.
As always, please consult your own tax advisor to make sure you can take advantage of the increased accumulated depreciation our studies generate. But have that discussion after you have an estimate in hand. Then you will truly be able to make an informed decision about your building and if it makes sense to study it.
If you are a commercial real estate owner or a commercial real estate broker, you’re going to want to familiarize yourself with our new cost segregation calculator. This is an excellent resource for you to get an idea what you might expect from a cost segregation study for your building.
Go to www.CostSegCalc.com and scroll down the page. You’ll see on the right hand side where you can enter in your asset details. No registration is required. Put in the cost basis, when it went into service, tax year etc and we will provide a range of what you can expect.
Below is a short demonstration as to how you can use this cost segregation calculator from CSSI Services.
If you like this information, be sure to check out more of my videos on my YouTube Channel. Connect with me on LinkedIn.
This morning I thought I’d share some thoughts about cost segregation and try to answer a number of questions that I get from owners and commercial real estate brokers.
For those who have a lot of income and tax liability who are building multi-family and hospitality properties, consider the following. It’s unlikely your tax, financial and construction advisors are taking all of these strategies into account.
Build with Green Zip Tape. By doing so, about 10% of your construction costs will move from 39 year life to 5 year life allowing you to take bigger depreciation deductions earlier. This is above and beyond what you would normally get with cost segregation. $10MM project might see an additional $1MM in 5 year life. At a 35% tax rate that’s $350,000 in income tax savings or deferral. No brainer.
Utilize 263(A) if you qualify. This allows you to EXPENSE indirect costs associated with the construction of your building. This works for self constructed assets. Must be a small business and fall under the government requirements (about $30MM in revenue or less). Can’t be a syndication. If you are building this for your own investment or own use, look into it. $10MM project could see 10-15% written off as EXPENSE and not capitalized. Also can be utilized in a tax year prior to your building going into service – say you started construction in 2024 but won’t finish and go into service until 2025…you an write off some of this on your 2024.
179D – Energy Efficiency Tax Deductions….this is for buildings with 40,000 SF or more (our requirement – not the government’s). We say 40,000 because there’s a cost vs the deduction analysis. At 40,000 it definitely makes sense. It might work at 30-35,000 SF. Might see a deduction of $.88/SF to $1.16/SF…could go all the way to $5/SF but many hurdles for that. Let’s call it $1/SF…that’s a $40,000 deduction for a 40,000 SF building. Nice thing is this deduction essentially comes out of the 39 year class life. It is not subject to potential limitations of bonus depreciation. If you’re going to hold the building, it’s also a no-brainer if you need to maximized deductions.
Cost segregation – of course this is the BIG tax deduction. Many building owners will see 20, 25, 30% of their building reclassified to 5 and 15 year life giving them a massive up front deduction. Without cost segregating your building, you will deduct 2.5% per year of the building cost (1/39). $10MM building cost could see $2-$3MM in depreciation expense moved to 5/15 year life. Depending upon the bonus depreciation rules at the time they might be able to take part or all of that either in year one or early on in their ownership.
As with all of this, please consult with your tax advisor before proceeding. If you’d like to discuss your project or any of these items noted above, please let me know. Connected with me on LinkedIn.
Yes they can. Generally speaking if you’ve owned the building for more than 12 years or so, it’s probable that it may not be worth studying. But that said, I always encourage owners to let us take a look. It could be that there is still enough basis to make it worth your while. It also could be that we identify capital costs that could be converted to expenses – i.e. the capitalization to expense study.
Cost segregation studies can typically be applied retroactively for properties that have been placed in service within the past several years. Specifically, you can:
Go back as far as 1987: The IRS allows cost segregation for properties placed in service after 1986, when the Tax Reform Act of 1986 was implemented. However, practical and useful applications are usually focused on more recent properties.
Catch up with a retroactive study without amending returns: If a property has been in service for several years, a cost segregation study can be performed now, and the missed depreciation can be “caught up” by filing a Form 3115, Change in Accounting Method. This allows you to claim the cumulative missed depreciation in the current tax year without having to amend prior-year tax returns.
About 40% of the studies we do at CSSI are “look-back” studies where the owner has owned the property for a year or more. I’d be happy to talk with you to see if it might make sense for you to do cost segregation on your property.
Here’s a bit more information about me as you look to engage a cost segregation specialist. I bring a unique background of sales, market, management and real estate to my work consulting with building owners. I can do studies in all 50 states in the U.S. across all building types and classes. CSSI also does R&D Tax Credits and 179D energy efficiency studies. I’d be happy to help you with those as well.
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.
I work with a lot of commercial real estate brokers around the country but it’s just a tiny fraction of the number of CRE brokers who should be using cost segregation in their practices. It’s a missed income opportunity for the broker but more importantly it’s a missed opportunity to provide a very powerful value-added service that will have a material positive impact on your commercial real estate client. You also leave yourself exposed that someone else might call them up to make mention of it and start to build a relationship with that client.
As the key point of contact in a transaction and tip of the spear so to speak, commercial brokers work with buyers of commercial real estate to go through the financials, due diligence, market opportunity and pricing of all kinds of buildings. Why not discuss cost segregation with your clients at the same time? It’s a key part of owning commercial real estate. It can help improve an owner’s cash flow, reduce their immediate tax liability and help them have a better understanding of their building. It definitely affects the proforma in a positive way. You don’t need to be the expert. You should have a partner in the business to whom you can connect your client for a no cost, no obligation consultation and estimate.
If you’re a commercial broker and you don’t have a trusted partner for cost segregation, consider giving this short video presentation a watch. It’s 11 minutes long. I provide professional, engineering-based cost segregation services all over the country. Our firm is one of the largest and oldest in the country. We have experience with all properties types and classes in all 50 states. We’ve now successfully completed more than 50,000 studies.
By implementing cost segregation into your commercial real estate practice, you will not only get paid referrals from us, but you will gain new clients and close more deals. It will happen. Everyone’s looking for an edge and I’m telling you, THIS will give you an edge in the marketplace. Give this a watch and then reach out to me for a conversation.
If you go back to my home page, you’ll see a map of many of the properties we have studied in the past couple of years. Under the “Projects Completed” tab on the home page, it has a drop down so you can see pictures of the buildings our team has studied. Many of these projects have come to us by referral from commercial real estate brokers. Some also come to us from CPAs and building inspectors.
Reach if you’d like to talk about this program to incorporate cost segregation into your commercial real estate practice.
