8 Tax Tools Every Commercial Property Owner Should Know

Real estate can be the best investment for wealth preservation when tax tools are applied!

Real estate investing can be a risky venture —strengthen your investments and increase your ROI through specialty tax services. As a commercial property investor/owner, there are several IRS-sanctioned tax benefits within your reach designed to uncover hidden value and profitability within your investments.

COST SEGREGATION

A cost segregation study is a federal income tax analysis that increases your near term cash flow in the form of a deferral, by utilizing shorter recovery periods to accelerate the return on capital from your investment in property. Whether it is newly purchased, renovated or recently constructed property, the components of your building may be properly reclassified through a cost segregation study by using shorter recovery periods for depreciation. The study carves out certain qualifying portions of your building into 5, 7 and 15-year life spans that are normally buried in 39 or 27.5 year categories. Most importantly, Engineered Tax Services offers premium cost segregation analysis in which we incorporate principles of construction tax planning (i.e., proactively addressing and recommending materials and supplies in the pre-design phase to ensure personal property classification as opposed to real property classification) and abandonments per the final repair regulations.

TANGIBLE PROPERTY REPAIR REGULATIONS

The Final IRS Regs relating to tangible property were issues in September of 2013 and provide for additional write-offs for most taxpayers. ETS can assist in creating required capitalization policies and identifying expenses for repairs and maintenance, which can reduce your tax liability and improve cash flow. First, we will identify which asset costs are not properly classified, then reclassify them as deductible repairs defined by I.R.C. §162 and §263(a). Deductible repairs may include “incidental repairs” that help to maintain efficient operating condition but do not necessarily prolong its life and material value or adapt the property to a new or different use. Expenses incurred or paid for incidental repairs and maintenance are not considered as capital expenditures and may be reclassified to accelerate deductions in the current year.

DISPOSITION/ABANDONMENT STUDY

When you undertake demolition or renovate a building and tear out old lighting, HVAC units and other building parts, these assets are abandoned. As such, their book value can be treated as a business deduction. Tangible personal property within a structure can be written off when a building is demolished or remodeled. (Value must have been identified prior to the demolition and it may not have been purchased with the intent to demolish.)

DEIRA/INSURANCE REPLACEMENT APPRAISALS

An insurance appraisal is a replacement cost analysis which provides an accurate estimate of the amount of insurance required to replace each structure and/or amenity exactly as it stood. We calculate each building’s reproduction cost on a component-by-component basis from the ground up and process the complex calculations needed to correctly estimate the labor and material costs. We provide a “Detailed Engineering Insurance Replacement Appraisal” (DEIRA) that is accepted by national insurance company underwriters to establish accurate property valuations, reduce and/or eliminate disagreements following a covered loss, and most importantly, reduce premiums while improving coverage terms and conditions. We have a ninety percent success rate for our clients.

ENERGY TAX INCENTIVES

ETS specializes in the energy certification process required by the IRS. The 179D deduction ranges between $0.60-$1.80/sq. ft. for the installation of energy efficient lighting systems, HVAC systems, and building envelope. We have provided thousands of the highest quality energy tax certifications across the country since 2005. Handling over 150 certifications every month, we have perfected the process by working closely with the IRS on a regular basis. We offer a measurable dynamic to increase your return on investment & improve efficiencies – all with the goal of reducing operating expenses & obtaining tax deductions or credits that you deserve.

HISTORIC TAX CREDIT

The federal tax law offers effective incentives to taxpayers who contribute to the preservation of our nation’s old and historic buildings. By rehabilitating directly or investing in the rehabilitation of eligible buildings, you can take advantage of one of two tax credits. The federal income tax credit is equal to 20% of the cost of rehabilitating historic buildings or 10% of the cost of rehabilitating non-historic buildings constructed before 1936. These credits provide a dollar-for-dollar reduction of income tax owed. Buildings eligible for the 20% rehabilitation credit include those used for rental residential as well as nonresidential purposes. Buildings eligible for the 10% rehabilitation credit must be nonresidential, commercial and industrial buildings. We can help you reap the tax benefits of rehabilitation and preservation projects as well as all related incentives and processes.

PRESERVATION

Historic properties listed in the National Register of Historic Places may be eligible for the 20% Federal Income Tax Credit. Certain historic properties listed in the National Register of Historic Places and/or designated as historic properties by local governments may be eligible for up to a ten-year exemption from a portion of local property taxes in communities in Florida who have adopted this exemption program. Similar tax exemption programs are available in other states.

RESERVE STUDIES

A Reserve Study is a budgetary planning vehicle that provides data for a property’s necessary and imminent major repairs, replacements, and/or required upgrades. The study provides planners the opportunity to budget for these expenditures, rather than securing a loan or reducing operating funds to manage these replacements, improvements, or repairs.

A Reserve Study is a complete financial plan which accurately projects the remaining useful life of each component selected by the client to be included and an estimate of the year each asset may require repair or replacement. The Reserve Study calculates the amount of annual contributions required to ensure adequate funding is available to meet each expense. The analysis can range from 5 to 30 years; however, it generally projects budget for a 20-year period.

The selection of a specialty tax provider for Cost Segregation, Energy Certifications, Tangible Property Regs, and other specialty tax incentives is critical to the process, the resulting benefit, and to ensure results that stand-up upon IRS examination. Performing the proper due diligence steps is vital to ensuring your tax filing position and to ensure that you gain every benefit that you deserve with the assurance of IRS compliance.

ETS is a licensed engineering firm staffed with professional engineers who marry the science of engineering with the principles of tax and accounting to arrive at financial solutions that result in increased cash flow, minimized tax payments and increased return on investment. Ask us how we are helping real estate investors, property owners, and tenants benefit from their investments, 800-236-6519.