Commercial property owners may benefit from recent changes to tax laws

Real Estate Weekly, Nov 7, 2001

According to U.S. Supreme Court Justice Learned Hand "...nobody owes any public duty to pay more taxes than the law demands."

Some tax laws have recently changed. If you own commercial or residential income property, a recent tax court decision now provides a method to add money to your bottom line. You do this by utilizing cost segregation techniques -- that is segregating the various building costs into separate categories as defined by the IRS. The IRS also allows you to claim catch-up depreciation. This is the amount you could have claimed in prior years, dating back to 1987, over a subsequent four-year period.

Essentially, cost segregation analysis allows an owner to depreciate certain types of building components and improvements over a shorter period than the typical 39 or 27.5 years generally used. For instance, most site work and land depreciation can now be depreciated over 15 years and many interior multi-family structural improvements over five to seven years.

We often hear the question, "Why hasn't my accountant told me about this?"

Well, first, it is relatively "new." Second, it requires architectural and engineering skill sets and expertise that most accounting firms do not have in-house, such as being able to read construction drawings and blue-prints, knowing construction on systems and cost estimating, as well as how various types of IRS asset classifications relate to existing construction. A cost segregation study does not replace the accountant's role in determining taxes or preparing your tax documents and forms. It provides information to the accountant so that the proper IRS forms may be prepared and the correct, allowable depreciation calculated.

Just about all buildings can benefit from a cost segregation study. But some buildings benefit more than others. Building types that realize the most benefits include shopping centers, multi-family dwellings, hotel and other lodging and war houses, and facilities with specialty equipment and components used for processing or manufacturing.

The tax savings can be significant. Historically, for most of our assignments, he fee paid to have a cost segregation study prepared generally ranges from $5,000 to $20,000. It is oft n gained back in multiples from the first year's savings. For example, a representative shopping center with a $3,000,000 depreciable basis would typically provide an after-tax present value savings of $120,000 when compared to utilizing the 39-year approach overall.