Everyone who owns or has invested in an apartment building should be familiar with cost segregation. Without it, you could be missing out on millions of dollars in tax savings! Keep reading to learn how apartment building owners can use cost segregation to reduce their tax liability and increase revenue.
Apartment Building Tax Concerns
Apartment building ownership can come with a variety of tax challenges that can be difficult to navigate. As a property owner, it's important to be aware of these potential issues and take steps to mitigate them.
One common tax problem associated with apartment buildings is the failure to properly depreciate the building and its components. Under the Modified Accelerated Cost Recovery System (MACRS), apartment buildings must be depreciated over a 27.5-year period. However, certain components of the building, such as appliances and carpeting, can be eligible for accelerated depreciation schedules. If not properly identified, these components may be depreciated over the longer period, resulting in higher taxes.
How Cost Segregation Helps
Cost segregation is a tax strategy that allows apartment building owners to reclassify certain components of their property as personal property rather than real property. This reclassification can significantly reduce the amount of taxes paid on the property, as personal property is depreciated over a shorter period of time than real property.
One of the main benefits of cost segregation for apartment building owners is the potential for significant tax savings. By reclassifying certain components of the property such as carpeting, lighting fixtures and appliances as personal property, owners can take advantage of accelerated depreciation schedules and reduce their tax liability. This can result in thousands or even millions of dollars in savings over the life of the property.
Case Study Examples
Apartment buildings often have a high percentage of assets that qualify for reclassification, making them one type of commercial property that can particularly benefit from cost segregation studies. Below are some real-world results illustrating the value of cost segregation studies conducted by Engineered Tax Services.
We’ll begin by taking a look at this $13.9 million apartment building in Westerville, Ohio. By reclassifying assets to more accurately report depreciation rates, investors were able to achieve over $4 million of first-year tax savings:
Purchase Price of Building: $13.9 Million
Building Type: Multifamily Apartments
Building Location: Westerville, OH
$4,232,005.50 in first-year tax savings
Reclassification
Cost Segregation Summary
Cost Segregation Benefit
Next up is this $26 million apartment complex located in Upstate New York. Had investors not hired Engineered Tax Services to conduct a cost segregation study, they would have missed out on nearly $2 million in first-year tax savings:
Purchase Price of Building: $26 Million
Building Type: Apartment Complex
Building Location: Upstate New York
$1,894,081.46 in first-year tax savings
Reclassification
Cost Segregation Summary
Cost Segregation Benefit
We’ll examine one more case study in this article, but these are far from the only examples available. In fact, we currently have a catalog of 30+ apartment building cost segregation case studies for you to browse.
Our final case study concerns a $52 million apartment building in Boca Raton, FL. Investors used cost segregation to save well over $18 million on taxes:
Purchase Price of Building: $52 Million
Building Type: Multifamily Apartments
Building Location: Boca Raton, FL
$18,835,122.64 in first-year tax savings
Reclassification
Cost Segregation Summary
Cost Segregation Benefit
Overall, cost segregation can be a powerful tool for apartment building owners looking to reduce their tax liability, increase revenue and comply with IRS guidelines. By reclassifying certain components of the property as personal property, owners can take advantage of accelerated depreciation schedules and realize significant tax savings.
Engineered Tax Services has more than 20 years of experience conducting cost segregation studies. As the nation’s leading specialty tax firm, we’re dedicated to helping everyday American businessowners obtain valuable tax incentives that were previously only available to Fortune 500 companies. Contact us today to receive a free cost segregation analysis.
