A Blog About Tax Savings for Building Owners
Dutch Bros is continuing to expand across the U.S. I had to post this as Daniel Herrold of Northmarq and his team are doing a great job all across the U.S. Anyway, this is a ground lease and if it’s structured that the new owner also owns the parking lot, this would be a phenomenal property for cost segregation.
Below is the link to Daniel’s post on LinkedIn.
Upstate Business Journal has published an excellent separate magazine outlining the many major construction projects going on in the Greenville market.
U.S. construction spending continues to increase per the U.S. Census Bureau’s monthly report. Spending was $2,071.10 billion vs. $2,014.7 October 2023 vs. October 2022. Spending was up 10% year over year. Here’s some additional excellent analysis on the recent construction spending from Trading Economics.
If we were in a recession, this growth rate would slow significantly and go negative. We aren’t there yet.
Real estate investors who are buying and holding long term and mid term rental homes should look at doing cost segregation to saving money on income taxes. I do a lot of studies for real estate investors across the country. We are doing a number of them these days for investors in the Upstate of South Carolina as well as in the state of North Carolina. Upstate CREIA and Carolinas Real Estate Investors Assocation are two outstanding investor associations.
If your property has a cost basis of around $200,000 or more and if you are planning to hold the property for at least another 3 years, it’s highly likely you will stand to benefit from doing a cost segregation study.
The costs will generally range from about $2,200 – $3,500 depending up the size and cost basis of your property and whether or not you’ll need to file an IRS Change of Accounting form 3115. The 3115 form is used to let the IRS know you’re moving from straight line to accelerated depreciation. It’s used all the time. In fact I think we draft about a 1,000 of these each year.
But if you own a property, you might end up saving $5,000 – $10,000 after paying for the cost of the study. This works if you’re profitable and having to pay taxes on your rental income, or if you are considered a full time real estate professional. If your expenses and standard depreciation already wipe out your income, then doing a cost segregation study probably doesn’t make sense to do.
I get asked to come in and present to commercial real estate brokers, financial advisory firms, CPA firms and occasionally a college might ask me to speak to their accounting students. The the folks who are consistently really interested in learning more about cost segregation are the CRE brokers…as well they should.
This is not only easy money but it’s a great value-add service that you can tell your clients about which in turn might lead to another deal. How so? Let’s say you help a buyer purchase a new building. As part of your due diligence, you get an estimate for cost segregation. It’s likely the owner is not familiar with cost segregation. You might end up saving that owner $30, $50, $100k+ on his/her taxes. It might even be enough that they want to buy another building with you. You can earn a referral fee on business you send our way. Of course it’s nowhere near what you earn with real estate commissions but it all helps at the end of the day. Telling your clients about cost segregation and getting them an estimate is a win-win-win for everybody.
I recorded a presentation that I recently used to help educate many commercial real estate brokers. It’s not meant to be an in-depth study of cost segregation but hopefully provides enough of an overview to help you understand the power of cost segregation and why you should have a trusted source to help you and your clients maximize their building’s cash flow while minimizing the taxes for the owner.
Anyone paying attention to Washington DC knows that our elected representatives have not put together a real budget. There is still lots to do when they get back to work 🙂 in early January. One of the things that has been floating around DC is the possible extension of the 100% bonus depreciation rule that was originally put into place by the Tax Cut and Jobs Act of 2017.
Many in commercial real estate and particularly the GPs who run the syndications for multi-family investments have become addicted to the 100% bonus depreciation rule. I like to call it the crack of real estate and tax. In 2023 it has moved to 80% bonus and in 2024 it’s scheduled to drop to 60% bonus depreciation.
Bonus depreciation comes in to play or all property with a class life of 20 years or less. When a cost segregation study is completed, the property that is normally all 39 year if commercial and 27.5 year if multi-family / residential investment, gets reclassified to it’s proper class lives which are 5, 7, 15, and/or 27.5 / 39 years. This allows for a much bigger deduction to be taken early in the life of the ownership of the property.
If you’re looking for cost segregation services or studies in the Upstate of South Carolina, I can help. I’m based in Greenville and work with many building owners in Greenville, Spartanburg and Anderson to help them with their properties. We have saved owners a small fortune on their income taxes.
Our firm conducts an engineering-based cost segregation study that allows you as the owner to maximize the deductions you might have with your building(s) when it comes to depreciation. Reach out if you’d like a free, no-obligation estimate on what your income tax savings might be if you utilize cost segregation. We can do this on properties if they have been newly acquired as well as those that perhaps you’ve held for a number of years. Call me at 864-276-1448. John Murphy, CSSI.
Industrial Outside Storage or IOS, is a class of property that has become increasingly popular especially in areas where there is a high concentration of warehouses, trucking and supply chain operations. Generally speaking this is a parcel of land where truck trailers are parked.
These IOS’s generally consist of fencing all around the property and then some kind of parking pad – often gravel of sorts. Nearly all of the improvements are land improvements. There will be a small part of it likely identified as utilities which are 39 year class life.
*Let’s say you buy a 5 acre parcel that already is an IOS and you paid $700,000 for it. Maybe you have a land value of $350,000. The remain $350,000 can be studied in a cost segregation study and get that identified properly. That’s not an expensive study. It might cost about $3,000. It’s likely you’ll end up with 90+% that gets identified as 15 year class life because they are land improvements. In 2023, you can take 80% of that in depreciation right away given the bonus depreciation rules.
If you have a property like this, reach out and we can run the numbers for you.
Do you own property on beautiful Lake Keowee in the Upstate of South Carolina? Is it a short-term rental? Long-term rental? Either way, you might benefit by doing cost segregation for tax savings.
I’m based here in the Upstate of South Carolina and work with many owners not only in South Carolina, but across the U.S. to study their investment properties for tax savings that can be the result of applying cost segregation to your properties.
Cost segregation is a tax planning strategy that can be applied to various types of real estate investments, including short-term rental properties. Short-term rentals, such as vacation homes or Airbnb properties, can benefit from cost segregation studies in order to maximize tax deductions and reduce taxable income. Here’s how cost segregation can be applied to short-term rentals:
While cost segregation can provide significant tax benefits for short-term rental property owners, it’s important to work with tax professionals or specialists who are experienced in this area, as it can be complex and requires expertise to maximize its benefits while staying compliant with tax regulations.
Many of the short-term rentals that I see tend to be nicely finished on the inside and often will have decent land improvements like driveways, patios, outdoor kitchens, docks and extensive landscaping.
How might this work you ask? Let’s say you paid $800,000 for your property that you’ve converted into an Airbnb in 2023. We’ll say the land is $150,000. That leaves you with $650,000 as your basis. (BTW, this math works essentially the same if your Airbnb was 2x as much or 1/2 as much). Of that $650,000, let’s say we identify 20% as 5 year property and 5% as 15 year class life property. That means you can accelerate 25% of the $650,000 or $162,500. In 2023, you can take 80% of that as Bonus Depreciation so you could take a deduction of $130,000. If you made $150,000 in 2023 as your Airbnb income, you could knock that down by $130,000. If you’re at the 32% tax rate, that’s a savings of over $40,000 in income tax savings. A study like this might cost you between $3,500 – $4,000. That’s an expense to you so it nets down to $2,720. Your ROI is about 15:1 or 1,500%.
Owners should always consult with their tax professionals to see if this makes sense for you to do. Feel free to reach out if you’d like to discuss. I’m happy to run a no cost, no obligation analysis / estimate for you. Let’s connect on LinkedIn or find my on Twitter @costsegbuilding.
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