As a Tax Director for a publicly-held REIT, should a cost segregation analysis be rendered on the properties held by the REIT?
It depends, but I would wholeheartedly recommend scoping the cost segregation opportunities on a property by property basis to assess the potential tax savings.
As a reminder, pursuant to I.R.C. § 856 and the corresponding treasury regulations, REITs (e.g., regardless of whether structured as a Traditional REIT; UP-REIT; or DOWN-REIT) are tax-free entities at the federal level if they adhere to and satisfy the yearly income and asset testing parameters amongst other requirements. However, REITs are taxable at the multi-state level. When utilizing cost segregation analysis coupled with state and local property tax abatement planning, the paradigm shift occurs from a tax planning strategy that merely encompasses a temporary / timing based difference (i.e., accelerating depreciation deductions through cost segregation analysis) to a tax planning strategy that now encompasses a permanent based difference (i.e., state and local property tax abatements).
As an overview, a Cost Segregation Analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 or 39 years) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, 7 or 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). By accelerating the accumulated depreciation deductions the overall cost basis of the property will be reduced which then potentially enables a state and local property tax abatement resulting in the reduction of your blended multi-state tax rates for both tax accrual and tax return purposes.
