A Blog About Tax Savings for Building Owners
The deadline is quickly approaching for us to guarantee that we can get cost segregation studies completed in time for your 2025 Extended Tax filing deadline. We still have capacity to get these studies done but it will be more difficult the longer you wait.
If you reach out to us in mid August for a 9/15 deadline, that might be too late for us to guarantee that we can complete it. That said, reach out and I can see if we will be able to accommodate that.
As we move into the second half of 2026, commercial real estate brokers have an opportunity to add significant value to their clients simply by understanding what I call the 20/20 Rule.
The rule isn’t an IRS rule. It’s a practical rule of thumb that can help buyers quickly estimate the potential tax benefits of a cost segregation study. The tax savings is often significant and is material for the new owner. It continues to surprise me that more CRE brokers never bring this up with your clients. Here’s a back of the napkin pitch that will help CRE brokers give their clients an idea on roughly how this might work to their benefit.
Here’s how it works.
The First 20: Land Value
Many commercial properties allocate approximately 20% of the purchase price to land. Every property is different, and buyers should discuss this with their CPA to determine the right land allocation. This is not something we as a cost seg firm determine for you. But for the purposes of this exercise, let’s use 20% because that’s a pretty common allocation.
Let’s assume a buyer purchases a commercial building for $1.2 million.
That leaves approximately $1 million of depreciable basis. This is new basis provided the property was not acquired through a 1031 Exchange. If it was, that will affect the basis and we would need the owner’s CPA to provide us with the carryover basis and new basis in order to make a decent estimate of what a cost segregation study might yield.
The Second 20: Accelerated Depreciation aka 100% Bonus Depreciation
The OBBBA make 100% bonus depreciation permanent in the tax code. There is no longer a phase out or sunset. Every commercial property is going to be different but most will tend to see something like 15-25% of the cost basis eligible for 100% bonus depreciation. 100% bonus depreciation is for assets that are 20 year class life or less. Many of these buildings will have 5-15% that might be 5 year life and 10-15% that might be 15 year life. Again, for the purposes of making this simple, let’s say that 20% of the cost basis can be accelerated – i.e. qualify for 100% bonus depreciation. This can be taken in year one of ownership or whenever the owner ends up applying the cost segregation to his taxes. It’s a one time tax benefit and it’s powerful.
Again, every property is different. Some properties may be closer to 15%. Others may be 25%, 30%, or even higher. However, 20% is a solid number to use when penciling this out.
Using our example:
Potential First-Year Deduction: $200,000
What Happens Without Cost Segregation?
Without a cost segregation study, the buyer depreciates the building over 39 years.
Using the same $1 million building basis, the first-year depreciation deduction for a property acquired midway through the year may be roughly $12,500. At a 35% federal tax rate for example, that’s a tax savings of $4,375. And the depreciation deduction in year one gets less the later in the year you close on a property. Depreciation is pro-rated.
What Happens With Cost Segregation?
The owner gets a deduction of $200,000 in this example and it doesn’t matter if he closed on the property at any date throughout the year. It’s not pro-rated like straight line depreciation. The tax rules allow the owner to take ALL the bonus depreciation that is eligible in year one. In the event it creates a loss because he can’t use it all, then he will just have a loss carryforward and can use that to offset his tax liability next year.
The $200,000 deduction at a 35% tax rate equals a $70,000 income tax savings for the year. That’s 16x greater than the straight line deduction. NOTE: we like to talk tax savings and it is for the year in which you take it, but it’s really a deferral and is why we always recommend owners discuss with their own tax advisors to be sure this is the right move for them. This will impact the recapture tax that will be owed if you sell the building in the future. Of course you could do a 1031 exchange to further defer the tax. Most owner understand the time value of money and would rather have the $70,000 in tax savings today and deal with the taxes at a later date. Those tax savings are free for the owner to use as he sees fit. He could make further investments, renovations, hire someone, buy a truck or just keep it in his bank account. He does not need to reinvest it back into this specific building.
The Opportunity for Commercial Real Estate Brokers
Most buyers and brokers focus on location, cap rates, financing, and cash flow. Very few understand the potential tax benefits available after closing.
That’s where brokers can create additional value and further demonstrate their difference in the marketplace. You don’t need to be a tax expert. Just do a back of the napkin estimate for your buyer and encourage them to get a quote for cost segregation estimate before or shortly after closing. I will often recommend CRE brokers to reach out if you have a buyer who is serious about a property. Let our team run the numbers for you so you have something solid to help in the decision making on the property. Cost segregation will help improve cashflow and ROI.
Remember most studies will often see a 10, 15, 20x return on their investment. For most owners, it’s a no-brainer. As a CRE broker, why not be the one to introduce your buyer to the concept of cost segregation. I would think by saving the owner such a substantial amount on his taxes that he might be more loyal to you and maybe do another deal with you in the future. It’s also key for you to have a trusted resource to get quotes and free consultation about cost segregation and it’s benefits. I’ll give you the straight information without over-promising.
Final Thought for CRE Brokers
The next time you’re selling a commercial property, remember the 20/20 Rule:
It’s a simple concept, but it can create significant tax savings for buyers and help brokers deliver value long after the transaction closes.
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:
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.
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