16A — June 2023 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
www.marej.com
O wners , D evelopers & M anagers By Nicholas Dooley, CMEA, Withum Reducing Your Tax Liability as a Multi-Family Real Estate Investor
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eal estate investors generally want to do everything possible to maximize their return on investment when investing in residential rental proper- ties. One of the most effective methods of accomplishing this is by reducing their income tax liability on the investment properties they own; this can be accomplished by conducting a cost segregation study. Per IRS guidelines, residen- tial rental property has a recov- ery period of 27.5 years. This means the property’s deprecia- tion deduction is calculated by
rental property into four sepa- rate categories: 1) Personal property which is typically depreciated over a 5- or 7-year period. 2) Land improvements which are depreciated over a 15-year period. 3) The building which is depreciated over a 27.5-year period. 4) Land which is non- depreciable. By allocating the costs to the various asset classifications and depreciating them over a shorter period of time, your tax liability is significantly
reduced, and your cash flow is greatly increased. However, you will pay more in income taxes later when the deduc- tions are no longer available, since they were front-loaded to the earlier years of the owner- ship of the property. With the Tax Cuts and Jobs Act of 2017, bonus deprecia- tion rules also created a great opportunity for accelerating deductions by increasing the bonus depreciation percent- age on property with a useful life of less than 20 years to 100%. Starting in 2023, 100% bonus depreciation begins a
five-year phase-out until it is set to be eliminated in 2027. Learn more about the bonus depreciation phaseout. Here are some actual results from cost segrega- tion studies Withum has completed. A taxpayer recently renovat- ed a multi-family rental proper- ty for $1,000,000. Withum was able to identify approximately $280,000 of assets eligible for the 100% bonus depreciation, resulting in increased cash flow from the income tax deferral of approximately $112,000. $280,000 Bonus Depreciation A taxpayer recently pur- chased an apartment complex for $18,600,000. Withum was able to identify approximately $3,100,000 of assets eligible for the 100% bonus depreciation, resulting in increased cash flow from the income tax deferral of approximately $1,100,000. $3,100,000 Bonus Depreciation A taxpayer recently pur- chased an apartment complex for $65,300,000. Withum was able to identify approximately $10,400,000 of assets eligible for the 100% bonus depre- ciation, resulting in increased cash flow from the income tax deferral of approximately $3,800,000. $10,000,000 Bonus Depreciation To learn more about how a cost segregation study may potentially benefit you as a multi-family real estate inves- tor, or commercial real estate investor, contact Nicholas Dooley, CMEA at ndooley@ withum.com or 609-429-5829. Nicholas Dooley, CMEA is a Cost Segregation Spe- cialist at Withum. MAREJ Dermody Props. announces two NJ land acquisitions for development MORRISTOWN, NJ — Der- mody Properties has an- nounced the acquisition of two parcels of land for development in the company’s East Region: LogistiCenter at Lumberton in Lumberton and LogistiCenter at Mt. Laurel in Mt. Laurel. In the past five years, Bur - lington County has been one of the most active submarkets in New Jersey with regard to leasing activity. MAREJ
dividing the tax basis by 27.5. For example, a property with a tax basis of $5,000,000 can take approximately $181,818 in allowable depreciation deduc- tions each year over the next 27.5 years ($5,000,000 / 27.5 yrs. = $181,818/yr.). The purpose of a cost seg- regation study is to identify, segregate, and reclassify the various assets of a residential
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