Your company’s real estate is likely to represent a large capital investment – are you missing out on real estate savings? If you own real estate and pay income taxes, you may benefit from the results of a cost segregation study, which is an analysis performed by trained professionals to identify property that should be classified as tangible personal property or land improvements, depreciated using 5, 7, or 15 year lives instead of the 27.5 or 39 years that apply to buildings. This acceleration of deductions can result in substantial tax savings benefits.
We will “mine” these cash flow benefits from:
- New constructed property
- Existing property undergoing renovation, remodeling, restoration, or expansion
- Purchases of existing property
- Leasehold improvements and “fit-ups”
- Post-1986 real estate construction, building acquisitions, or improvements where no cost segregation study has been performed
- Property acquired under Section 1031 exchanges
- Purchases or inheritances of interests in partnerships which own appreciated buildings
For property placed in service in prior years, the IRS allows a “catch-up” deduction in Year 1 for the additional depreciation deductions that are identified in a cost segregation study to which you were entitled but did not claim in previous years. This can generate substantial tax savings in the year the study is done.
One of Dean Dorton’s most recent cost segregation studies on a $7.9 million apartment complex that was constructed in 2015 generated tax savings in the first year of $437,000. The present value of accelerated deductions (discounted at 8%) exceeded $397,000. The return on investment for this study was 85.7 to 1.
For property placed in service in 2016, additional tax incentives available include 50% bonus depreciation and an increased limit in section 179 expense to $500,000.
Bonus depreciation allows taxpayers to write off 50% of qualified tangible property with a recovery period of 20 years or less and certain qualified leasehold improvement property that is placed in service in 2016. Thus, the 5, 7, and 15 year property that is identified in a study may qualify for this additional depreciation deduction that wouldn’t normally be identified if the property was being depreciated over 27.5 or 39 years. These tax incentives for 2016 make cost segregation studies even more beneficial for the current tax year. Similar tax incentives are also available for property placed in service in tax years 2008-2015.
What About My Accountant?
Cost segregation is a highly specialized segment of tax law. The volume of judicial decisions, IRS ruling, regulations, and other interpretations spans thousands of pages of text. The challenge is to apply this complex knowledge to the unique facts of your industry, your company’s circumstances, and the processes of your operation.
Dean Dorton uses an Atlanta-based engineering firm to provide cost segregation studies to our clients. This engineering firm conducts studies that conform to the Cost Segregation Audit Techniques Guide issued by the IRS. They have performed over 15,000 studies and have successfully defended all challenges brought forth by the IRS.
We work in tandem with your CPA, whether you are served by a large international firm, a regional firm, or a local accountant, to serve your best interests and save you money.
To find out more or schedule a review of your properties, contact your Dean Dorton advisor or Brandi Marcum at firstname.lastname@example.org.