The self-storage industry has witnessed remarkable growth in recent years, driven by the increasing demand for space to store personal belongings and business items. This expansion has attracted investors seeking stable and lucrative real estate investment opportunities. As the number of self-storage facilities continues to grow, it is essential for investors and property owners to be aware of and utilize tax-saving strategies. Cost segregation is one such strategy, providing significant tax benefits and accelerated depreciation for self-storage facilities.
In this blog post, we will delve into the concept of cost segregation, its advantages for self-storage facility owners and the process of conducting a cost segregation study. By understanding the nuances of this tax strategy, you can unlock substantial tax savings and enhance your facility's financial performance.
Why Self-Storage Buildings Are Ideal for Cost Segregation
Qualification as Tangible Personal Property
Storage units can qualify as “tangible personal property” under the U.S. tax code because they are considered movable and not permanently attached to the land. This classification allows self-storage facilities to benefit from a shorter depreciation schedule. Instead of depreciating assets over the standard 39-year class life for commercial buildings, storage units can be depreciated over just seven years, resulting in significant tax savings.
Interior Partitions and HVAC Systems
In cases where storage units do not qualify for the seven-year class life, other components of the self-storage facility may still be eligible for accelerated depreciation. For example, interior partitions and HVAC systems (if the facility is cooled) typically qualify for a five-year class life. This shorter depreciation period also results in substantial tax savings compared to the standard 39-year schedule.
Benefits of Cost Segregation for Self-Storage Facilities
Accelerated Depreciation
Cost segregation studies allow facility owners to apply the Modified Accelerated Cost Recovery System (MACRS), enabling faster depreciation of certain assets. This results in more significant tax deductions in the early years of an asset's life.
A cost segregation study identifies and classifies tangible property within a self-storage facility, breaking it down into categories with different recovery periods:
- 5-year property—Personal property such as equipment, fixtures and machinery typically falls under this category.
- 7-year property—Because storage units are considered tangible personal property, they can often be classified as seven-year property.
- 15-year property—Land improvements including landscaping, parking lots and fencing are considered 15-year property.
Increased Cash Flow
Accelerating depreciation allows self-storage facility owners to defer taxes to later years, reducing their current tax liability. This deferral boosts the present value of tax savings, providing more cash flow for reinvestment or other financial requirements.
The augmented depreciation deductions lower a storage facility's taxable income, further diminishing the overall tax burden. This reduction enables investors to retain more of their hard-earned profits and reinvest them into their businesses.
Tax Planning Opportunities
Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) currently allows for 80% bonus depreciation on qualifying property. This provision enables self-storage facility owners to immediately write off the cost of eligible assets in the year they are placed in service, further increasing tax savings.
Section 179 Expensing
In addition to bonus depreciation, facility owners can also take advantage of Section 179 expensing, which allows property owners to expense up to a specified amount of the cost of qualifying property in the year it is placed in service. This benefit can significantly reduce taxable income and provide even more substantial tax savings.
Qualifying Self-Storage Facility Assets for Cost Segregation
Buildings and Improvements
The primary structure of a self-storage facility and any attached improvements, such as office spaces or additional storage areas, can be included in the cost segregation study.
Site Improvements
Land improvements, such as landscaping, parking lots and fencing, are also eligible for cost segregation. These assets are typically classified as 15-year property, allowing for accelerated depreciation.
Personal Property
Equipment, fixtures and machinery used in the operation of a self-storage facility are considered personal property and can be depreciated over a shorter period (usually five years). Examples include security systems, lighting and HVAC equipment.
Non-Qualifying Assets
Some assets do not qualify for accelerated depreciation through cost segregation. These typically include land, as it does not depreciate, and intangible assets such as goodwill or trademarks.
Examples of Eligible Assets in Self-Storage Facilities
To provide a clearer understanding of what may qualify for cost segregation, here are some common assets found in self-storage facilities:
- Security and access control systems
- Climate control systems
- Elevators and material handling equipment
- Interior and exterior lighting
- Paved surfaces and walkways
- Signage
- Office and maintenance equipment
- Shelving and storage systems
Selecting a Cost Segregation Specialist
If you’re interested in having a cost segregation study conducted for your self-storage facility, you’ll need a partner you can trust. That’s where Engineered Tax Services (ETS) comes in. Our cost segregation specialists possess a strong background in engineering, construction and tax law. Furthermore, we have extensive knowledge of the self-storage industry and a proven track record of conducting successful cost segregation studies.
Partnering with ETS ensures you maximize the potential benefits of cost segregation. Our qualified professionals accurately identify and classify assets, guaranteeing compliance with tax regulations while minimizing the risk of IRS scrutiny.
The Cost Segregation Study Process
Data Gathering and Analysis
An ETS engineer will begin by collecting information about your self-storage facility, such as construction or acquisition costs, blueprints and asset records. This data will be meticulously analyzed to identify eligible assets and their associated costs.
Site Visit and Documentation
An engineer will then visit your facility to gather additional information, verify the existence and condition of assets, and document their findings with photographs and notes. This thorough approach ensures a comprehensive understanding of your facility's unique features.
Asset Classification and Valuation
Using the collected data, our specialists will classify the assets into the appropriate depreciation categories and determine their value based on the applicable tax regulations. This precise classification maximizes the tax benefits available to you.
Report Preparation and Delivery
Finally, we’ll compile our findings into a detailed report, which will outline the assets, their classifications and the associated depreciation schedules. This report will serve as the basis for adjusting your tax filings and claiming the advantages of cost segregation. With ETS, you can trust that you are receiving the highest level of expertise and service throughout the entire cost segregation process.
Conclusion
Cost segregation is a powerful tax strategy that can be particularly beneficial for self-storage building owners. By leveraging the unique classification of storage units as tangible personal property and the potential for accelerated depreciation of other facility components, you can enjoy significant tax savings, improved cash flow and increased property value. Understanding the intricacies of cost segregation and partnering with experienced specialists like those at ETS ensures that you maximize the benefits of this strategy while maintaining compliance with tax regulations.
Whether you are a seasoned investor or new to the self-storage industry, cost segregation can provide the competitive edge needed to enhance your facility's profitability and drive long-term success. By unlocking tax savings through cost segregation, you can reinvest in your business, create new opportunities and ultimately achieve your financial goals.
Don't miss out on the opportunity to optimize your tax savings! Contact us today for a free cost segregation analysis and discover how our expertise can benefit your self-storage facility.
