M id A tlantic Real Estate Journal — Owners, Developers & Managers — Professional Services — November 19 - December 23, 2021 — 9C P rofessional S ervices
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A By Robert Rahner, CFA, ASA, CCSP A Tale of Two Tax Scenarios: Cost Segregation Services Offer Investors Both COVID Relief & Opportunity the interior of non-residential buildings. Not All Studies are Created Equal
standards and provide a code of ethics for the industry. Using an ASCSP-certified professional helps ensure the quality of the study. As the commercial real estate industry continues to encounter lasting effects of COVID-19, implementing cost segregation as a tax strategy is a critical way for investors to regain lost ground, offset taxable income generated from other properties, carry forward losses to future years, increase cash flow to reinvest in upcom - ing projects and look forward to a brighter future. continued on page 12C
s COVID-19 continues to reinvent itself, many commercial property owners and tenants alike still struggle in its wake. While some sectors are recovering and even thriving, others must try to recoup from devastating losses. Investors with unused office or retail space may have to make unexpected building improvements or even repur- pose a building just to survive the pandemic’s impacts, leav- ing them short on cash. On the other end of the spectrum, in the booming industrial / logistics sector, investors face soaring construction costs and often must finance sophisticat - ed technology systems to meet increasing demands. However, these investments can have tax advantages when owners or ten- ants take advantage of the IRS approved, engineering-based tax strategy of cost segregation. This important incentive accel- erates depreciation deductions on commercial property to save tax dollars immediately. What’s Cost Segregation? While commercial buildings generally must be depreci- ated over 39 years, the IRS has designated certain types of building components and land improvements that can be accelerated to five-, seven- or 15-year schedules (such as certain flooring, decora- tive millwork, and paving). Under the Tax Cuts and Jobs Act, an additional immediate 100-percent bonus depreciation incentive effectively cut rates even further, allowing the full expensing of many costs in the year incurred. Cost segregation studies identify which assets in and around a property qualify for these reduced depreciation schedules, which can save in- vestors tens of thousands or evenmillions in income taxes. A study can be performed on new construction/acquisitions or on previously owned property (up to 15 years) without amending tax returns. Investor Payoff Table 1 details the percent- age of assets that can typically be reclassified and the result - ing tax savings gained on dif- ferent property types. While cost segregation is not a new concept, the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 extended its benefit by reinstating a 15- year depreciation schedule and 100-percent bonus for “qualified improvement property” made to
Average Cash Flow Increase Generated by a Cost Segregation Study* Property Type Typical % Reclassi Þ ed First Year Tax Savings First Year Depreciation Apartment Building 24% $475,800 $1,309,400 Hotel 23% $460,000 $1,228,300 Medical Of Þ ce 20% $400,000 $1,081,300 Of Þ ce Building 17% $340,000 $934,400 Retail Strip Center 18% $360,000 $963,300 Warehouse 16% $320,000 $885,400 * Based on a $5M building eligible for 100% bonus depreciation
Studies are typically initiated either directly from a property owner or their accountant. Ap- proaches used to perform stud- ies range from the IRS-preferred “detailed engineering approach” using actual cost records to a much less accurate “rule of thumb” approach. Because of these variations, the American Society of Cost Segregation Professionals (ASCSP) was formed to help establish creden- tials, create/maintain quality
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