Cost segregation is a terrific strategy for any commercial building owner. New retail development tends to do quite well we are finding especially in part because of the land improvements to develop the property. New retail buildings for Starbucks for example are excellent for cost segregation.
With a new Starbucks not only do you tend to see great numbers from the 15 year class life category but also in the 5 year as well as the stores tend to be finished nicely.
If you’re interested in getting a no-obligation free estimate on your building, please don’t hesitate to reach out at 864-276-1448. I work all over the U.S.
Last week Congress released Donald Trump’s tax returns in hopes to find something that they can either shame him with or perhaps file criminal charges. But remember, Trump was and is a real estate developer and owner before becoming President of the United States. I remember hearing people clammoring to see his taxes but my thoughts were it’s likely we’ll see little to nothing because he probably maximizes his real estate depreciation to minimize or eliminate his tax liability. It turns out that clearly is one of the strategies he utlizes. The best ways to maximize depreciation on your buildings is by doing cost segregation.
According to the article in BisNow, Trump used a number of different strategies including loss carryforwards to eliminate his tax liability. Don’t think this can be used by the small to midsized investor? Think again. These kinds of strategies are available to all U.S. taxpayers. You just have to have a tax professional who can help you think strategically about these things as well as have a trusted source for cost segregation.
If you own an investment property or commercial building that has a depreciable basis of at least $200,000 and you have not done cost segregation yet on your building, please reach out and I will be happy to discuss this with you. We’ll run a no obligation estimate that will show you what we expect to achieve with increased accumulated depreciation and what it will cost. You can then discuss it with your tax professional and decide yea or nea. It’s that easy. We’ll collect a few documents from you as well as send someone out to photograph your property and then we’ll get started on the study. It’s pretty painless to you as the owner. It takes us six weeks to complete our engineering-based cost segregation study.
Just a reminder for building owners and their tax professionals out there…we are the outsourced provider for hundreds of tax professionals and firms who need to get cost segregation done for their clients. We can help with partial asset dispositions on large ($100k+) renovations as well as capitalization to expense reversals. If you have clients who have buildings and if they haven’t done a cost seg study, reach out and let’s talk. We can usually make it work for a client down to about $200,000 in depreciable building cost / basis. We are still 5-6 weeks away from our deadlines to hit tax deadlines of 3/15 and 4/18/23…that time will go fast. Let’s get them scheduled.
Cost Segegation is particularly valuable for REALTORS®
Many REALTORS® own investment property and some own commercial property. If they do real estate full time, generally they can use depreciation from their real estate investments to offset tax liability from their real estate sales activity. As always, please consult with your own tax advisor to make sure you qualify for this and that your involvement with your investments is such that you can utlize the depreciation to lower your income taxes.
But let’s say you do qualify and you have the following scenario…
REALTOR® Commissions for 2022 net after expenses: $150,000. Let’s say you own a single family rental home that you purchased this year for $325,000 and the land is worth $50,000 leaving you with a building cost / basis of $275,000. When you evaluate your P&L on your rental home after deducting your expenses, debt service and standard depreciation, you end up making $2,000 net profit this year. That certainly isn’t going to create much of a tax burden for you so you wouldn’t do a cost segregation study just to save $700-$800 taxes for the year. But this isn’t the entire picture. In this situation, a cost segregation study may help you save about $15-$20k in income taxes. Let’s take a look.
If this building was put into service right away Jan. 1, 2022, your depreciation for the year would be $10,000 which is the straight line depreciation amount you can take each year for the life of your ownership or until you’ve fully depreciated the building after 27.5 years. A cost segregation study might generate a depreciation expense of about 20-25% of the cost basis which was $275,000. A study would generate a depreciation expense of about $55,000 – $68,000 which means this REALTOR could likely lower their taxable income from $150,000 to $95,000 or lower. That might be a 30% tax savings for this agent which would be about $15-$20,000. The cost to do a study like this might be $2,250 – $2,500 – net cost would be about $1,500. Pay $1,500 and save $15,000 on your taxes. This is a 10:1 ROI or a 1,000% return on your money. Not bad.
REALTORS® especially should consider cost segregation as a tax minimizing strategy if they own rental investment properties or commercial properties. As always, please consult with you tax advisor. If you have questions or would like to get a quote, please don’t hesitate to reach out to me at john.murphy@costsegregationservices.com or 864-276-1448. I work all over the country in all 50 states.
My experience is that 8 out of 10 building owners aren’t aware of this incredible tax application that boosts their cash flow and lowers their taxes… commercial brokers, insurance brokers, tax and financial profressionals and property managers are all trying to reach buildling owners and yet few if any are having conversations about cost segregation. You don’t need to be an expert. Just ask if they’ve done it yet to their building. It’s a missed opportunity all the way around.
If you don’t ask, you’re missing out on potentially really helping a client. In some cases you might gain a new client because of it. Maybe you end up writing another policy or pick up more money to invest from them. Or maybe with the extra money they save they end up buying another building with you…or you pick up a new tax client. Plus you can get paid a referral if you join our referral program. It’s easy and costs you nothing. Contact me to join our program and let’s keep business and building owners in business and profitable! Note: financial services cannot be paid a referral due to regulations. However, let’s say you help someone save $50-$100k on their taxes…perhaps they will reinvest some of that tax savings with you buying financial / life insurance products.
Dental buildings have really come a long way. We are seeing more and more of them with beautiful design and finishing. Many now cost between $1.5 – $2.0 million. That’s a big expense for anyone and especially for dentists who may well be continuing to pay for dental school loans.
If the ownership of the operating business and the LLC that owns the dental building are the same, the dentist can group these entities the first year they put the building into service. That allows the operating LLC to take advantage of the depreciation generated by the real estate LLC. The tax savings can be significant.
Many of these buildings will see 20-30% of the building cost or basis able to be depreciated in the first year. For buildings placed into service starting in 2023, the bonus depreciation drops from 100% to 80% so please note that.
Recently we saved this dentist well over $100,000 on their income taxes when we did an engineering-based cost segregation study for them.
Everyone thinks about buildings when they think about depreciation and the benefits of cost segregation, but don’t forget about the massive positive impact land improvements can on your depreciation. It’s common that land improvements might be anywhere from 4-15% of your overall building cost or basis. Sometimes we’ll even see 25%+! With 100% bonus depreciation, let’s say you have a $1 million building….if 10% of the building cost is land improvements, you could potentially take a $100,000 deduction in year one of your ownership! That right there would be about a $30,000+ tax savings – i.e. the money stays in your bank account and not the IRS’s.
The IRS classifies land improvements as 15 year class life property. Depending upon the type of property, we will regularly see such land improvements as:
Parking lot / driveway
Parking lot striping and barriers
Sidewalks, patios and curbs
Site drainage
Exterior signage
Landscaping and irrigation
Retaining walls
Security light poles
Exterior fencing
Exterior dining enclosure
Exterior bollards
Dumpster enclosure
Pool
Docks
Site improvements can have a BIG impact on your depreciation and provide a big depreciation expense for building owners when they apply a cost segregation study. Remember the cost segregation study will separate out your property from it all being lumped together as either 39 year (commercial) or 27.5 year (residential investment). Property will be reclassified to 5, 7, 15, and 27.5 / 39 year property. Right now for properties purchased / in-service as of Sept. 28, 2017 – December 31, 2022 can take 100% bonus depreciation. Bonus depreciation is available for property with class lives of less than 20 years…so all your 5, 7 and 15 year property could be depreciated in year 1 of your ownership. That can provide a significant tax savings for owners. Depending upon the building, you might be able to immediately depreciate 10-30% of the overall building cost or basis.
For those who want to grind harder on the topic, here’s the official link to the IRS on how to depreciation property. It’s a comprehensive list on all types of property and class lives. Otherwise, if you’d like to talk with me about seeing if your property might be a good fit for cost segregation, please don’t hesitate to reach out. My information is available under the Contact tab above or connect with me on LinkedIn.
As always, please consult with your own tax advisor for your specific situation to see if a cost segregation study might be beneficial to you.
Cost segregation works pretty much on all commercial buildings. If the building cost is north of $175,000 or so, there are tax savings being left on the table if the owner does not segregate the building in to 5, 7, 15, and 39 year class lives which is what happens when you do an engineering-based cost segregation study.
What might one see for results in such a study for a Panera Bread commercial building? Well, the owner might save about $100,000 on his/her income taxes by doing a study. The cost of the study would be a small fraction of the overall savings.
Let’s say in this scenario we have the following:
Building Cost: $1,500,000
Increased Accumulated Depreciation: $310,000
Estimated Tax Savings @32% Federal Rate: $99,200
The building owner doesn’t have to write a check to the IRS for that $99,200. The money stays in his/her bank account and they can do with it as they see fit….remodel bathrooms, buy a new building, buy a new car, pay off debt, increase wages for employees, buy a short term rental, take some vacations….they money is there’s and remains with them. I don’t care how much money people have…they could have millions, but there hasn’t been a single person yet that I’ve come across who says they aren’t interested in keeping an extra $100,000. And it doesn’t have to be $100,000….we run scenarios for all kinds of property…let’s say you own a building that is only $300,000 but by doing an engineering-based cost segregation study, you might be able to save $15,000-$20,000 on your taxes. That’s real money and people would rather keep that money in their bank accounts rather than the IRS’s.
Note, the numbers above are estimated tax savings. Each study is different and we wouldn’t know the final results until the actual study is completed. A building owner’s tax situation and tax rate might be different. If they were in the 37% tax bracket their tax savings would be quite a bit higher. If they are in a lower bracket then the savings would be lower. As always, I can’t give tax advice. When considering cost segregation, get an estimate and then discuss it with your own tax professional to see if you can benefit from doing a study.
Commercial brokers play a very important role in the ongoing development and improvement of a community. They are often in-the-know of what’s happening in a particular area…who’s developing what and which companies are moving in and/or expanding. They help business owners, building owners and investors of all kinds with sourcing or developing a building or project to suit the prospective owner’s needs. They often can help give recommendations on financing, inspections, engineering, surveying, insurance, renovations, construction etc. The one area they are weak in is in cost segregation.
Why should commercial brokers have a trusted source for cost segregation amongst their mix of other expert advisers whom they can readily share with a prospective client? It’s pretty simple….commercial brokers should introduce cost segregation to every client and have each building evaluated. There’s no cost to do this and the upside is significant certainly for the client. The commercial broker can also generate another income stream for his brokerage by partnering with us to deliver this service to his clients.
We know the upside for the client on cost segregation but why wouldn’t the commercial broker also participate in creating another revenue stream? Ask me about our referral program. It can help pay for some office lunches, outings and year end parties. But the bigger thing is that the broker will have helped his client maximize his/her building by saving a lot of money on taxes. The tax savings provided to the client might actually be enough to help that building owner go buy another building of which the broker may represent him/her on that and make another commission.
Remember, not every building or every building owner is going to need to actually do a cost segregation study. Some buildings aren’t profitable and maybe won’t be for some time. Some owners aren’t particularly profitable either and so they don’t need the tax deductions. However, every building should be evaluated so you at least have it on hand and can reference it each year as you review your particular tax situation for that year. Perhaps you don’t do cost segregation for a variety of reasons in 2022…maybe not even in 2023. But by 2024, it probably makes more sense. Well, a smart business owner, building owner and investor is going to know what that might look like for him or her. There’s no reason they should not have an estimate on hand and in their files. It should be part of a normal business and tax review process if not quarterly…at least annually.
Cost segregation will save big money for most owners. They might see between $30,000 – $70,000 in income tax savings per $1 million in building cost or basis. We can do studies on buildings with a cost or basis as low as about $175,000.
Lastly, I will say that as I speak with building owners, 8 or 9 out of 10 have not heard of cost segregation. Of those that might be familiar with it, there’s a lot of misperceptions as to it’s value vs. it’s cost. It’s very common for me to quote estimates that demonstrate a 10, 15, 20:1 return on their investment in the study. That’s a 1,000 – 2,000% return. Most commercial real estate delivers returns in the 5-8% range…we’re talking massive returns here with cost segregation compared to the investment in the study. The most likely way a building owner would hear about cost segregation would be through the commercial real estate broker. Please share the information…make an introduction and let’s help building owners maximize their buildings, lower their taxes and increase their cash flow.
Be sure to reach out and I’d love to help – John Murphy, 864-276-1448
John Murphy – Cost Segregation – Spartanburg Office Building
It’s always a good day when I can deliver our engineering-based cost segregation study to a building owner to helpl him/her save money on their taxes. Remember, what we do is reclassify a building from 39 year straight line depreciation in to 5, 15 and 39 year class lives. This allows the owner to take a bigger depreciation expense earlier in the life of his/her ownership of the building. That translates in to paying lower income taxes…and in some cases, it eliminates your income tax liability for a while.
This was a gorgeous older building in Spartanburg. It goes by the name Warrior Duck. It’s a 3 floor office building. As you can see by the image above, we saved this owner nearly $90,000 in income taxes.
As with all of my articles, I am not given tax advise. Everyone’s tax situation is different and each building performs differently. Please consult with your own tax counsel when considering cost segregation.
