Want a free energy upgrade or remodel? By integrating 3fficient’s IRS Cost segregation, property owners and investors can get their buildings modernized (by 3fficient) for free and perhaps even get paid.
First, a little background. The term commercial property (also called commercial real estate, investment or income property) refers to buildings or land intended to generate a profit, either from capital gain or rental income. Commercial building owners investing in real estate are tasked with handling the management, maintenance, taxes, insurance and accounting of the property. Commercial real estate can include land, building(s), and associated land improvements that are either constructed or acquired from an investor or a business entity.
Examples of commercial buildings include industrial, warehouses, manufacturing, offices, shopping centers, supermarkets, retail, restaurants, hotels, motels, casinos, entertainment, auto dealerships, self-storage, hospitality, hospitals, MOB’s, etc. Apartments and rental homes are considered residential property that qualify for a shorter building depreciation life than commercial buildings.
Typical Real Estate Depreciation
Commercial and residential building assets are typically depreciated either over 39 year straight-line for commercial property, or 27.5 year straight line for residential property as dictated by the current U.S. Tax Code. However, the Internal Revenue Service (IRS) allows building owners the opportunity under the Modified Accelerated Cost Recovery System (MACRS) to depreciate certain land improvements and personal property much faster. Certain land improvements can be depreciated over 15 years at 150% declining balance (DB), with certain personal property depreciated over 7 or 5 years at 200% DB. This depreciation analysis is known as a cost segregation study. Which can only be provided by qualified building engineers. Here’s why by example.
The plumbing costs associated with installing a 3/4″ copper pipe connected to a restroom sink in a supermarket building must be depreciated over 39 years. That same 3/4″ pipe installed to a bakery sink qualifies as a 5 year write-off. The restroom sink is related to the operation of a building, the bakery sink is related to the taxpayers business. Anyone who has owned commercial or residential rental property for any length of time knows that it will need maintenance, repairs and renovations as the years go by. Recent tax legislation known as the Tangible Property Regulations (TPR) allow building owners to dispose of assets as they are replaced (vs remaining on the books for 27.5 – 39 years). This is a big deal.
Cost segregation is based on the fundamental principle that “a dollar today is worth more than a dollar tomorrow”. The same logic applies to the statement: “a tax deduction today is worth more than a tax deduction tomorrow”. By accelerating a buildings’ depreciation, property owners can lower their tax liability and thus realize a significant increase in cash flow. This larger cash flow—resulting from postponing tax payments—is available for other investments, like energy upgrades which are also fully depreciable right away.
“The major advantage of cost segregation is not necessarily that it will produce more depreciation deductions. Instead, due to the time value of money, the advantage of these front-loaded deductions will be quantifiably greater than had the deductions been spread over longer periods of time using slower depreciation methods.”Journal of Accountancy, © 2005 by the AICPA
Take Advantage of IRS Allowed Tax Benefits to Owners of Commercial & Residential Rental Properties Utilizing a Cost Segregation Study.
The only way to have these components segregated is to have a detailed engineering-based Cost Segregation study performed on your property. 3fficient delivers these studies for clients across the country with our engineering approach to cost segregation, which includes our work paper documentation and detailed engineering based report that is guaranteed to survive IRS Audits. Our professionals possess over 250 years of combined cost segregation experience.
BONUS: The IRS allows current building owners to go back as far as 1986 and “catch up” on the depreciation they should have been deducting from the day the property was placed in service WITHOUT AMENDING PRIOR TAX RETURNS.
The benefits of a cost segregation study by 3fficient include:
- An immediate increase in cash flow
- A reduction in current tax liability
- The deferral of taxes
- The ability to reclaim “missed” depreciation deductions from prior years (without having to amend tax returns)
All of the additional depreciation found as a result of our detailed engineering-based approach is taken in the year of the election.
To discover how 3fficient can help you with accelerating the depreciation on your commercial or residential properties, contact us or complete the free estimator tool for your property.