Friday 22 September 2017

Cost Segregation Delivers Big Tax Benefits for Apartment Building Owners

There is never a bad time for building owners to lower their tax bills in order to improve cash flow. One of the best strategies available to do that is cost segregation. A “cost seg” study is a specialized tax and engineering analysis that allows owners to reclassify their real property expenditures thereby accelerating their depreciation deductions and possibly also recovering missed depreciation deductions from prior years. This can result in a reduction of tax liability which produces increased cash flow; a significant benefit especially in difficult economic times. When conducted by an experienced team of engineering, accounting and tax experts, a cost seg analysis can be a huge value to apartment building owners.

Surprisingly, many property owners forget to reap the rewards of a cost segregation study until the moment the tax bill arrives, while others are not even aware of the concept. Fortunately, it is not too late for you to take advantage of these benefits.

CASE IN POINT
In 2010, a building owner with many residential developments was referred to our firm by their accountant. With year end approaching, the client realized that they would have a large tax bill to offset and asked us to perform a cost seg study on a large property in their portfolio. The $11 million property, a 154-unit residential development in New York, was purchased in 2006, which required us to perform a retro (look-back) study with a 481(a) adjustment of over $1M.

To perform a detailed analysis, we worked collaboratively with the clients’ staff to examine the building’s many components and systems. As per the IRS audit techniques guide, engineers visited the building and conducted a site tour, compiling photographs and detailed notes. Once the data was collected, it was then analyzed to identify the assets eligible for accelerated tax depreciation and accurately determine their value. Finally, the engineering and tax components of the cost segregation study were integrated, combining the vast amount of information into one document.

A SIZABLE TAX SAVINGS
The clients were excited by the results. The building’s total cost was $11,000,000. Of this, the cost segregation study permitted $2.2 million, or 19%, to be reclassified from 27.5-year to 5-year MACRS (Modified Accelerated Cost Recovery System) property. 9 percent, or $1M, was reclassified to 15-year MACRS property. This reclassification of assets resulted in a Net Tax Benefit of over $700,000 in the first year. This included any assets eligible for the 50% Bonus Depreciation.

Since the results of a cost segregation study depend upon accurate accounting and engineering evaluations, which is not something a typical CPA firm is equipped to handle, CPAs and accountants typically prefer to refer their clients Madison SPECS’ experienced, qualified cost seg specialists.
The tax benefits that emerge may vary in size, but they all go to building a better bottom line.

Eli S. Loebenberg, CPA is CEO of Madison SPECS LLC, ,a division of Madison Commercial Real Estate Services, LLC, which offers nationwide specialty services for the commercial real estate market. For more information, call 866-500-Madison.

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