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Mastering the Art of Expensing and Accelerating Depreciation Webinar

October 11, 2023 / John Murphy

We have an upcoming free course for CPAs to earn continuing education credit (1.5 hours of CPE) but this will also be a helpful webinar for commercial real estate brokers, commercial bankers and of course, building owners. Commercial building owners should know this information. If you are a residential real estate investor or owner of short-term rentals, this will also be a helpful course.

Prepare for a comprehensive exploration of the intricate world of cost segregation and gain valuable insights to demystify the application of Tangible Property Regulations, resulting in significant reductions in your client’s taxable income. Unlock the artistry behind these regulations to maximize their advantages. We will dissect the most prevalent depreciation and expensing opportunities for clients who own and develop commercial real estate and short-term rentals. Whether it’s Commercial Buildings, Apartment Complexes, Long-Term or Short-Term Rentals, Disposition of Materials, or Interior Renovations, each presents unique opportunities for expensing and accelerating depreciation, provided you have a foundational grasp of the regulations and access to the requisite cost data.

Rather than drowning in the complexities of regulations as is often the case in presentations, we will utilize real-world scenarios encountered by building and short-term rental owners to assist you in crafting a strategy for expensing and accelerating depreciation, including leveraging Bonus Depreciation. An integral aspect of our sessions is addressing your specific queries to empower you in confidently applying these regulations to meet your client’s precise requirements. Hundreds of Tax Professionals have consistently rated CSSI’s team of presenters and content as excellent. We cordially invite you to join us for an engaging 1.5-hour discussion filled with strategic insights and ample time for addressing your inquiries. CPE credits are available for CPAs through our NASBA certified provider.

LEARNING OBJECTIVES

By the end of this lesson, attendees will be able to discuss advanced depreciation and expensing strategies related to cost segregation including:

•Common scenarios for expensing and accelerating depreciation using the Tangible Property Regulations and Cost Segregation

•Advantages of Short-Term Rentals

•When to use Bonus Depreciation vs Section 179

•Renovation Depreciation — When to use Partial Asset Disposition (PAD) and Qualified Improvement Property (QIP)

•Grouping OpportunitiesYour clients who own buildings may be eligible for substantial deductions. Grasp the implications in these real-life scenarios to deepen your understanding of strategies and gain a competitive edge, ultimately affording your clients the deductions and cash flow they rightly deserve.

REGISTRATION INSTRUCTIONS

•You must register for and attend the entire session to receive CPE credit.

•A course evaluation must be completed to receive CPE credit.

•Group attendance will not be recognized. Each attendee must be logged in individually to receive credit.

When you register, you can put my name down as the rep who invited you.

Cost Segregation Explained for Mobile Home Parks and RV Parks

October 10, 2023 / John Murphy

Cost Segregation Explained for Mobile Home and RV Park owners in 2 minutes. These are great assets for cash flow and the depreciation these parks generates is second only to C-stores and tunnel car washes. It’s not uncommon to see 50-90% of the property get reclassified so it can be accelerated.

What does this mean? Let’s say you purchased an RV Park for $2.5MM and the land is worth $500,000. That leaves you with a cost of $2MM which as it sits is 27.5 year property. But what if you could reclassify 75% of it by doing cost segregation? That’s $1.5MM in property that has been reclassified as either 5 or 15 year property. In 2023 you can take 80% bonus depreciation. So the owner could get a depreciation expense of $1.2MM in year one of owning the property. If he/she took straightline 27.5 year deprecation without cost segregation, the depreciation expense would be a maximum of about $72,000 that first year depending upon when they put it into service.

Remember that cost segregation is based upon cost and not appraised value. If you have a property that you paid $200,000 for 20 years ago and now it’s worth $1.5MM, a study isn’t going to help you much unless you’ve done a ton of improvements along the way. What we are seeing is a number of these parks are either being developed or they are trading hands. Once that happens, the new owners should definitely look at doing cost segregation.

I work all over the U.S. in all 50 states and get calls from all over the place to help with cost segregation not only on these assets but all types of commercial property. I’d be happy to talk with you at no charge and if you’d like our team to run the numbers for you, just let me know. Connect with me on LinkedIn or Twitter.

Tesla’s Electrifying Transformation: Diner, Drive-In Theater, and Charging Station to Replace Shakey’s Pizza Parlor on Santa Monica Boulevard

October 9, 2023 / John Murphy

Tesla to build a very cool diner and drive-in theater charging station in West Hollywood. Check out Tesla’s new diner proposed for Santa Monica Blvd, Los Angeles, CA.

BizNow has a details on it as well. It’s a great concept and one that I think other developers could mimic. When do we start to see these in Charlotte, Raleigh-Durham, Atlanta and Nashville?

The South Carolina Success Story: Advanced Manufacturing’s Rise in the Palmetto State

October 9, 2023 / John Murphy

This is a remarkable article about the growth and success of South Carolina as a business powerhouse in the southeast. There has been a lot written about South Carolina and its transition from textiles to advanced manufacturing but this is the most comprehensive piece I have found on the subject.

South Carolina continues to garner attention on the global stage. BMW and Michelin certainly have had a massive impact on that. They are in the Upstate of South Carolina. Boeing in Charleston now also plays that key anchor role in the other part of the state.

There are so many assets here in South Carolina. From a business perspective, it’s a very friendly business climate that starts at the state level. Most counties are friendly as well. The Port of Charleston is a huge driver of commercial success as well as the Inland Port Greer which allows ships to unload in Charleston and run the boxes on rail right to the Upstate where it can then be readily trucked all up and down the east coast.

The quality of life is also quite good across the state. Worldclass beaches and resorts run all along the eastern seaboard of the state from Myrtle Beach down to Charleston and Hilton Head. The Blue Ridge Mountains can be seen and visited through the Upstate just north of Greenville, SC about 45 minutes to an hour.

The cost of living is generally cheaper here in SC than you’ll find in most parts of the country. Property taxes in particular are some of the lowest you’ll find anywhere.

Benefits of Cost Segregation for Flex Buildings in Spartanburg, SC

October 7, 2023 / John Murphy

New Flex Industrial Space – Spartanburg, SC

Nearly every week I’ll get asked the question if a particular building would be worth studying. My comment is generally they are all worth studying. Would it be worth it if the fee were $15-$20k? No. But under $5k for a lot of these buildings…all day long. What if you could accelerate or depreciate 10-20% of your building’s cost in the first year? (Each building will vary).

Here’s a brand new development by Jordan Skellie, CCIM with Lee and Associates in Greenville, SC. This is an excellent brand new flex building located in Spartanburg, SC. These kinds of small industrial spaces are in high demand. In other parts of the country they might call these Contractor Garages. This building is within about 3 minutes of entering and exiting the all important I-85 that runs between Atlanta and Charlotte and goes right through Greenville and Spartanburg in the Upstate of South Carolina.

Jordan still has some some available as he just got the Certificate of Occupancy. Reach out to Jordan Skellie if you’re interested in the space.

How to Use Cost Segregation Studies and Estimates to Eliminate Quarterly Tax Payments

September 11, 2023 / John Murphy

Commercial building owners can use a cost segregation study results to eliminate or minimize their quarterly tax payments. These building owners can even just use an estimate or predictive analysis from a qualified cost segregation firm an apply that to the calculations for what their tax liability might be for their quarterlies.

As I write this today, the September 15th deadline is coming up late this week. As building owners and their CPAs make the final calculations for what the owner’s estimated tax bill might be, we can generate an estimate for that owner yet this week that would impact what that owner owes for his quarterly payment.

For example, let’s stay a business owner / building owner is expecting that he or she has to write a check to the IRS for $20,000 for his quarterly payment. This owner also owns a building that he has owned for a few years but has never done a cost segregation study. We can run an estimate this week and provide an idea what that owner might save on his taxes. Let’s say the estimate comes back and we believe he may save $30,000 on his income taxes if he applied it to this year’s tax return. If that’s the case, that $20,000 that he owes this week could stay in his checking account rather than being sent off to the IRS.

Please consult your own tax advisor. This post is not tax advice. Please reach out to me if you’d like for me to run an estimate on your building.

Unlocking Environmental Benefits: How Cost Segregation Supports Climate Action in Commercial Buildings

September 11, 2023 / John Murphy

Photo: Environmental and Energy Study Institute – ESSI

Cost segregation is a tax strategy used by commercial building owners to accelerate depreciation deductions on certain building components, such as electrical systems, plumbing, and HVAC systems. While cost segregation can provide financial benefits in the form of reduced tax liabilities, it may indirectly contribute to climate change mitigation efforts in a few ways:

Incentivizing Energy-Efficient Upgrades: Cost segregation can free up capital for building owners by providing immediate tax benefits. This additional capital can be reinvested in the property to make energy-efficient upgrades, such as installing energy-efficient lighting, insulation, windows, or HVAC systems. These improvements can help reduce a building’s energy consumption and carbon footprint.
Supporting Renewable Energy Investments: Building owners who benefit from cost segregation may choose to invest in renewable energy systems like solar panels or wind turbines. These investments can reduce a building’s reliance on fossil fuels and decrease greenhouse gas emissions.
Encouraging Sustainable Practices: As commercial building owners become more conscious of the environmental impact of their properties, they may be more inclined to adopt sustainable practices, such as recycling, waste reduction, and water conservation, in an effort to further reduce their carbon footprint.
Promoting LEED Certification: Cost segregation can help free up funds that can be used to pursue Leadership in Energy and Environmental Design (LEED) certification or other green building certifications. Achieving these certifications often requires investments in energy-efficient building designs and technologies, which can lead to reduced energy consumption and environmental benefits.

It’s important to note that while cost segregation can indirectly support climate change mitigation efforts, its primary purpose is to optimize tax benefits for building owners. The extent to which cost segregation contributes to environmental sustainability will depend on the specific choices made by the building owner and the extent to which they prioritize sustainability in their investment decisions.

Additionally, tax laws and incentives related to energy-efficient building improvements and renewable energy systems may change over time, so it’s essential for building owners to stay informed about current regulations and consult with tax professionals to make informed decisions regarding cost segregation and its environmental implications.

If you’re looking for more details on how you can make your commercial buildings more environmentally friendly, ESSI has some excellent information.

What Kinds of Properties are Good for Cost Segregation?

September 1, 2023 / John Murphy

What kinds of properties are good for cost segregation? I get asked this a lot especially as I introduce the concept of cost segregation to commercial real estate brokers. The fact of the matter is, cost segregation works on any and all properties where the owner is receiving a rent or lease payment. With the firm I represent, we generally add one more qualifier and say that the basis or cost needs to be about $200,000 for it to make sense to study. And the reason for that is the minimum study will cost about $2,000 and if you have a $200,000 building – maybe an SFR – you might see a depreciation expense of $30,000 – $40,000. If you’re at the 24% income tax rate, that’s a tax savings of $7,200 or so. Sometimes we still do studies down to about $150,000 in cost basis and it’s still a benefit for the owner.

Cost segregation works on all kinds of property:

Industrial
Manufacturing
Warehouse
Office Warehouse
Self Storage
Cold Storage
Office
Retail Strip Centers
Strip Malls
Restaurants
Fast Food Restaurants
Auto Repair Shops
Hotels / Motels
Apartment Buildings
Rental property – SFRs, Condos, Townhouses
Short-term rentals – Aibnb, VRBO
Gyms, Athletic and Fitness Centers

Determining if cost segregation is right for you is a fairly straight forward endeavor. You will always want to consult with your tax advisor about your particular situation. It really just becomes a math issue. You get an estimate from me and then discuss with your tax advisor. Does it make economic sense or not. It’s also not as expensive as you might have been led to believe. For most of our clients it is not a big set back and they typically see 10-20x return on the investment with us. That’s 1,000 – 2,000% return on your investment. It’s generally a no-brainer.

Cost Segregation for Short-Term Rentals – VRBO and Airbnb

September 1, 2023 / John Murphy

Short-term rental ownership exploded during Covid. The business model has been a good one for many investors throughout the country. These property owners can take advantage of cost segregation just like they would if they owned a commercial building or an apartment complex.

Short-term rentals, VRBOs, Airbnbs are considered 39 year property. It’s commercial property like a hotel is commercial property. It’s not 27.5 year property which is what a long-term rental would be such as a single family rental or an apartment building.

Is it worth is to doing cost segregation on an STR? Yes, of course. Where it might not be beneficial is if you just aren’t netting much profit or if you expect to sell your property within the next year or two. But generally, from what I hear, owners will net $25,000 – $50,000 per year.

In a cost segregation study, the property will be reclassified from all of it being 39 year depreciation to 5, 7, 15 and 39 year property giving you a much bigger deduction earlier on in the life of your ownership. Let’s use simple math to make some calculations. Let’s say you own an Airbnb and you have $600,000 all in. The land is about $100,000. That leaves you with $500,000 cost basis. Normally the FF&E is a separate expense from the real estate. In this case we figure you have this as a separate line item of $35,000 and it is not included in the real estate.

When we do a study on a building like this, we will generally see about 15-20% will be reclassified as 5 year class life property. The land improvements which are 15 year class life property will often come in somewhere in the 3-10% range depending upon the property. So for simple math, let’s say we identify 20% between the 5 and 15 year property. 20% of $500,000 is $100,000. You would get a $100,000 deduction against your income in year one or whenever you decide to do the study and apply it. Now in 2023, bonus depreciation has dropped to 80%. (If you own an STR that you placed into service between Sept. 27, 2017 and Dec. 31, 2022, you would qualify for 100% bonus depreciation). So that $100,000 in depreciation generated by our study would have 80% of that applied to reduce your taxes in 2023. Let’s say you net $50,000 in 2023. That’s after all your expenses, debt service and regular straight line depreciation. If you’re at the 32% tax rate, you’d owe the IRS $16,000. If you did cost segregation, you would owe ZERO and would have a loss carry forward that would eliminate most, if not all, of next year’s tax liability. The cost for such a study might be $3-4k. If you have owned the property for at least one tax year, you would need to file a 3115. That will end up costing you about another $1-2k to complete.

So if you own a short-term rental property and are making money, be sure to reach out to get a quote and see how it might work for you.

#lakekeowee #lakehartwell #lakenorman #lakemurray #STR #Airbnb #VRBO #costsegbuilding #johnmurphycostseg #taxsavings #costsegregation

John Murphy Cost Segregation Services, Inc. "Unlocking enefits: Why Property and Casualty Insurance Agents Should Offer Cost Segregation to Clients"

Maximizing Tax Savings: How Doctors, Dentists and Lawyers Can Leverage Cost Segregation for Real Estate Investments

August 26, 2023 / John Murphy

Why doctors, dentists and lawyers should consider utilizing cost segregation with their real estate investments to save money on their income taxes.

I do a lot of work with doctors, dentists and lawyers when it comes to cost segregation. For nearly all of them, it’s a passive income investment. There are times though when they own the building(s) that they run their operating business out of – i.e. self rental. At that point they often can take advantage of “grouping.” In that case, cost segregation is a grand slam as they can use the depreciation from their real estate to offset their operating business income. It’s massive. Sometimes I run into situations where the doctor, dentist or lawyer or some other high income W-2 earner own a short-term rental like an Airbnb or VRBO and their spouse is running the operation. At that point they might also be able to utilize the depreciation generated from cost segregation to offset their high W-2 income. (BTW, as with all of these things…this is not tax advice. Please consult your own tax advisor regarding these strategies). I will publish information in a future blog post about high W-2 earners owning and operating short-term rentals.

But let’s get back to owning real estate as a passive income investment for these highly compensated professionals. If they own residential real estate investments (rental homes, duplexes, triplexes, quads, apartments etc) or if they own commercial real estate of any kind and IF they earn a profit at the end of the year, they will owe federal income taxes at their marginal rate. More often than not that rate is 32, 35, or 37%.

Let’s say they own a few buildings and when all is said and done, at the end of the year, they have a net profit of $10,000. They expect their investment to grow in future years if not through the purchase of additional units or buildings, then through rent growth. The $10,000 in net profit is after all expenses, debt service and normal straight line depreciation. If they pay taxes at a 35% rate, they would owe the IRS $3,500 for the year. Next year it would likely be more as their net profit grows. A cost segregation study would eliminate this $3,500 tax obligation for the year and would likely wipe out future income tax liabilities on their real estate investments for years to come. How could this be you ask? The magic of increased accumulated depreciation expense / i.e. bonus depreciation or accelerated depreciation creating a large loss carryforward.

Let’s say in the scenario above, one of the properties you own is a $500,000 duplex and the land is worth $100,000 which is not depreciable. So $400,000 is your cost / basis that can be depreciated. A cost segregation study will identify and separate the 5, 15 and 27.5 year property. Often this might be between 20-25% of the building cost or basis. Given that information, you will likely see an $80,000 – $100,000 depreciation expense. If you purchased the building and put it into service between Sept. 27, 2017 and Dec. 31, 2022, it qualifies for 100% bonus depreciation meaning you can take all of that $80-$100k in depreciation in one year. (At this point bonus depreciation starts to phase out – for buildings put into servince in 2023, they will qualify for 80% bonus depreciation…in 2024 it goes to 60% etc). So let’s say it’s $80,000 in depreciation. You had a $10,000 net profit and were going to owe $3,500 to the IRS that year and likely every year going forward. By doing the study, you would not have any taxes owed this year. You’d have a $70,000 loss carry forward which you would utilize in future years. In this scenario, you may have eliminated your tax liability for the next 6-7 years. A cost segregation study for a building like this might cost $3,500 or so. You might also have to file an IRS Change of Accounting Form 3115. (If you’ve owned the property for at least one tax year, you will have to file this form). The 3115 let’s the IRS know you’re going from straight line to accelerated depreciation. We draft those typically for about $750 and your tax advisor would sign off on it.

Let’s review…you have $4,250 into the study and 3115 draft. (You’ll probably have some additional fees from your tax advisor as they have to fill out the 3115 information document so we can draft that form). So maybe your tax advisor is going to charge you another $500. So you’re all in at about $4,750 +/-. That’s a business write off for you so it’s really costing you a net of $3,087.50 roughly. That’s less than what you were originally going to have to pay the IRS when we started. The $80,000 in depreciation expense that you’ll get, ends up saving you about $28,000 in federal income taxes ($80,000 x. .35). That’s a 9 to 1 return or 900% return on your investment. You likely wiped out your tax liability for years to come and you can use that money to reinvest, put in the bank, take a trip etc. It’s your money. You can do with it what you want.

If you’d like to learn more or get a quote for your building, please just reach out and I’d be happy to discuss. We alway recommend you also talk with your tax advisor. Once you get a quote from us, please have your tax professional review it to make sure they are on board and that you can in fact utilize the depreciation expense we generate with cost segregation.

Cost Seg Building