Cost segregation is an important strategic tax tool that can help commercial real estate owners and investors increase cash flow and lower their tax liability through accelerated depreciation deductions and the deferral of federal and state taxes. However, many fail to realize how they can benefit from the tax laws that allow cost allocations.
Cost segregation is an important strategic tax tool that can help commercial real estate owners and investors increase cash flow and lower their tax liability through accelerated depreciation deductions and the deferral of federal and state taxes. However, many fail to realize how they can benefit from the tax laws that allow cost allocations.
Overview
Cost segregation identifies qualified real property that can be depreciated in as little as five, seven and 15 years. Through a cost segregation study, teams of experienced engineers and tax professionals analyze and reclassify certain interior and exterior components and assets into class lives that can be accelerated for faster depreciation. This enables CRE owners and investors to increase their current tax deductions and defer income tax, both of which can improve cash flow.
Taxpayers who own commercial properties, purchase existing properties, construct new projects and remodel real estate can qualify for accelerated depreciation through a cost segregation study.
Properties ranging from $500,000 to $50 million in value all can yield significant tax deductions. Those with added features such as high-quality finishes or components also fare favorably. Examples of commercial properties that may qualify include:
- Manufacturing and industrial facilities with advanced equipment
- Grocery, home improvement and big box stores containing machinery and equipment
- Distribution centers and warehouses
- Healthcare clinics and long-term care facilities with labs and technical equipment
- Automobile dealerships
- Restaurants, hotels, breweries and wineries with equipment on site
- Shopping malls, retail and convenience stores
- Office buildings with on-site parking, equipment and amenities
- Multifamily homes and apartment buildings with areas for parking and recreation
Bonus Depreciation
The Tax Cuts and Jobs Act of 2017 (TCJA) brought two changes related to bonus depreciation that benefit CRE owners and investors. First, the bonus depreciation percentage was increased to 100% for assets acquired after September 27, 2017 through December 31, 2022. After December 31, 2022, the bonus deprecation scales down annually through December 21, 2026.
Second, used property became eligible for bonus depreciation which previously had not been the case.
The QIP Fix in the CARES Act
The CARES Act economic stimulus package included a technical correction to bonus depreciation for qualified improvement property (QIP). QIP refers to the interior portion of a commercial building that was improved after the building was first placed in service. The fix not only includes QIP as a 15-year property, it also made the change retroactive to December 22, 2017, when the TCJA was enacted.
Property owners now can recover QIP costs incurred in the past two years as bonus depreciation, adding significantly to their cash flow in a time of great need. Going forward, QIP costs can be treated as bonus depreciation on current returns.
Take Action Now to Improve Your Tax Position
If you wonder if you could benefit from a cost segregation study, consider these questions:
- Is it an investment property? Only investment properties are eligible.
- Is there an opportunity for bonus depreciation? The size of the property’s value may not matter.
- Have tenant improvements been made? Even small improvements can yield tax savings.
- Are there personal property and/or land improvements? Both should be reviewed.
- Is there opportunity to take deductions at ordinary tax rates?
- Has the property been recently sold? It may still be eligible for bonus depreciation.
Request a Cost Segregation Study
The engineering and tax professional teams at Engineered Tax Services can help you evaluate how a cost segregation study can improve your tax position. They have helped CRE owners and investors significantly increase their cash flow by identifying and reclassifying assets of their buildings for faster depreciation. Request a Free Benefit Analysis to identify an estimated benefit and ensure a cost segregation study makes sense for your property.
