Real Estate Journal — Owners, Developers & Managers — 2017 Walter R. Cohn, Esq. Memorial EXPO— March 24 - April 13, 2017 — 13B
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2017 W alter R. C ohn , E sq . M emorial EXPO By Eli Loebenberg, CPA, Madison SPECS Guidelines to property improvements provide tax deferral strategies
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key component of any commercial lease agreement is the ten-
• Plumbing systems, in- cluding pipes, drains, valves, sinks, bathtubs, toilets, wa- ter and sanitary sewer col- lection equipment and site utility equipment. • Electrical Systems, in- cluding wiring, outlets, junc- tion boxes, lighting fixtures and associated connectors. • Fire Protections Systems, including sensing devices, computer controls, sprinkler heads, sprinkler mains, as- sociated piping or plumbing, pumps, visual and audible • Escalators • Elevators
alarms, alarm control panels, heat and smoke detection de- vices, fire escapes, fire doors, emergency exit lighting and signage, and firefighting equipment. • Security systems, win- dow and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, and entry and access systems. • Gas distribution systems Betterment, Restoration and Adaptation Recent IRS Regulations ex- pand the definition of capital- ization of structural property
costs. The amount paid can be considered an improve- ment if it is made to either the building structure or one of the building systems. An improvement to a unit of property is amounts paid which result in the better- ment of the property, res- toration of the property, or adaption of the property to a new or different use. Betterment of a unit of property is amending a mate- rial condition or defect that existed prior to the acquisi- tion, expanding or extend- ing the unit of property, or
increasing the productivity and strength of the unit of property. For example, the owner of a retail building adds a stairway and loft to increase its selling space. The costs to build the stairway and loft are considered an improvement because they increase the capacity of the building structure. Restoration of a unit of property is restoring it from a deteriorated state, rebuild- ing it to a like-new condition after the end of its class life or replacing a major component. continued on page 14B
ant improve- ments and allowances wh i ch a r e provided by the landlord. The landlord usually pro- v i des cus - tomized al-
Eli Loebenberg
terations to a rental space in order to configure the space for the needs of that particular tenant. The costs of building out or retrofit- ting a space for a tenant are considered property improve- ments which may be eligible for shorter life treatment. The costs incurred while constructing, acquiring or remodeling real estate assets can be offset with a valuable tax deferral strategy- the cost segregation study. A cost segregation study is a specialized tax and engi- neering analysis that allows owners to reclassify their real property expenditures, thereby accelerating their depreciation deductions. It is also possible for landlords to recover missed depreciation deductions from prior years. This reduction in tax liability can produce an increased cash flow. The Tax Code determines how to break down the costs related to repairs or capi- tal improvements. The IRS Regulations require busi- nesses to segregate their real property building costs into eight defined building sys- tems. When the taxpayer is determining whether eligible improvements were made, the building structure and each building system can be analyzed as separate struc- tural assets. Expenditures relating to each building system are evaluated both as repairs or improvements with respect to that particu- lar system as well as with respect to the entire building as a whole. The building is evaluated and broken out into units of property (UOP) according to Eight Enumerated Building Systems. • HVAC systems, including motors, compressors, boilers, furnace, chillers, pipes, ducts and radiators. How to Classify Expenditures?
GET MORE TAX DEFERRALS OUT OF YOUR PROPERTY IMPROVEMENTS
Accelerate Depreciation and Improve Cash Flow
The costs of building out or retrofitting a tenant's space may be consideredproperty improvements eligible for shorter depreciable life treatment. A Cost Segregation Study can accelerate tax depreciation deductions and improve your cash flow.
Madison SPECS’ team of in-house, qualified accounting, engineering and tax experts can help you to obtain the greatest tax benefits fromyour real estate holdings. Contact Madison SPECS to find out how a Cost Segregation study can benefit you.
888.773.2773 · www.madisonspecs.com Specialized Engineering & Cost Segregation
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