Engineered Cost Segregation for your Commercial & Multi-family Property
This article was original published for the Talkin’ Green column in the Lake Geneva Regional News Real Estate Guide. Download a copy of the column from the Lake Geneva Regional News Real Estate Guide.
Getting an Engineering Cost Segregation Study done for your commercial building, hotel or multifamily building allows for the breakdown of certain components of your building’s assets to be accelerated from the standard 39 year commercial depreciation schedule (or 27.5 years for multi-family residential) into possible buckets of 5, 7, and 15 years. Some components of your commercial building will have to remain at 39 years, but let’s accelerate the 20-50% that we can.
Money and cash flow today is always worth more than money 30 years from now. For example, if you paid $200,000 in income taxes in the current tax year, and had an Engineering Cost Segregation Study done that yielded an additional accelerated depreciation of $100,000, you could receive a check from the Government for $40,000 (once your Accountant completes and files the appropriate forms) based on a 40% tax rate.
And, in cases where the amount of the identified accelerated depreciation exceeds the amount of paid in tax from the current tax year, the commercial property owner is even able to go back the two previous years in recouping monies that have already been paid to the Government. If needed, this program even allows for a carry-forward of the accelerated depreciation garnered.
Now to begin taking advantage of this opportunity, you need an experienced cost segregation Engineer to perform the study. The study covers the following areas:
- Classifies structural components of a commercial building.
- Determines whether the structural components are permanent in nature, or are decorative.
- Determines whether each component is only incidental to the operation and maintenance of the building.
- Applies, per IRS Regulation 1.48-1(e)(2), the sole justification test for personal property.
- Reviews applicable legislative analysis and committee reports. Along with items 1-4 above they must have comprehension and knowledge of all the IRS and Court rulings on Engineering Cost Segregation Studies from 1997 to present.
Now you can see why finding an Engineer with the Cost Segregation expertise to perform such a study is so valuable. Remember, accountants are not engineers and the majority of engineers would have no idea how to go about performing such a study.
With just a few pieces of information, a free Engineered Cost Segregation benefit analysis and fee estimate can be provided to any commercial property owner with just the following information:
- The year you built or acquired the commercial property, and what the estimated value of the property was when it was built or acquired.
- The current estimated cash value of the property at the present time with the land value shown as a separate value.
- A copy of your current income tax building depreciation schedule. Properties that have had improvements made should include a depreciation schedule that describes how they allocated the improvements.
Example Tax Benefits
The results of the following analysis represent a benchmark of expected benefits. In this example, the property was acquired mid-year in 2005. In the tax years of 2005 and 2006 they would have been entitled to depreciate a total of $37,410 using a 39 year straight line schedule. Now, using the Alternative Method of Depreciation from the Engineered Cost Segregation Study, on the same property, they can depreciate $174,297. This is a difference of $136,887, which taxed at 40%, would yield a tax savings benefit of $54,755. The column on the right shows the tax savings net cash flow comparing the accumulated depreciation at 4.5 years of ownership. That $77,033 tax savings is real increased cash flow to help pay down your loan or invest in a new project, instead of paying the money to the government.
Traditional Staightline Depreciation
|Building Cost||Recovery Period (Years||Annual Recovery Total||2006||2009|
Cost Segregation Study Depreciation
|Improvement||Building/Improvement Cost||Recovery Period||2006||2009|
Value of Cost Segregation
|Increased Depreciation Expense||$136,887||$192,583|
|Tax Rate (estimated)||40%||40%|
|Tax Savings Benefit||$54,755||$77,033|
*Assumptions made using a mid-2005 building acquisition date.
We have all heard the phrase -“You can pay me now or you can pay me later.” In the case of paying income taxes, it is better to get the added savings and cash flow now and pay the taxes later!