Appraisers lower costs for federal tax savings on small property depreciation
Posted by Nick Niesen on November 8th, 2010
Tax savings through cost segregation is no longer out of reach for investors in small and medium size properties. With appraiser expertise, fees for analysis are often one-third to one-half lower than those charged by traditional preparers.
Several years ago a definitive court case ruled that tangible personal property included in an acquisition or in overall costs should be depreciated as personal property for asset recovery, using the old Investment Tax Credit principles to classify personal property.
This meant that owners of improved properties could distinguish between real property and personal property to depreciate component costs over varying useful lives. Basically, instead of depreciating an entire commercial property over 39 years, or residential roperty (single-family rentals or multifamily) over 27.5 years, certain components are correctly identified as depreciating in much less time. For about 135 items, useful life periods can be 5, 7 or 15 years. This is known as cost segregation.
The result of increasing depreciation is lower taxable income (which would have been taxed at 35%) and more income taxed at the capital gains rate (15%) when the property is sold. Furthermore, it works for any type of improved property.
Until recently, primarily large accounting firms or engineering firms implemented cost segregation studies, addressing large and newly built properties and sometimes outsourcing the analysis.
Now a revolutionary paradigm shift is opening the door to very significant savings for owners of small properties. Much of the change is based upon introducing the efficiencies of highly knowledgeable real estate appraisers who often apply industry-accepted cost estimation techniques before determining remaining asset life. By not ?over-engineering? the staffing or production process, professional fees are lower. Yet, results can usually meet or exceed those of far more expensive reports. This approach has been successfully field-tested by IRS auditors.
Changes that appraisers are introducing to cost segregation analysis and reporting are addressing: 1) the size of the property being analyzed, 2) the age of the property, and 3) an affordable price point. O?Connor & Associates, a nationwide real estate service firm, is taking advantage of such techniques to effect these beneficial changes:
1.Owners of property with an improvement basis as low as $500,000 can benefit from cost segregation. This compares to the limited properties worth $5 to $10 million and above that previously benefited.
This compares to the traditional fees ranging from $10,000 to $20,000 and up for comparable size properties.
In late 2005, O?Connor?s pipeline of cost segregation work was up more than 100%. As owners are preparing for 2005 federal tax filings, many are tapping into this opportunity to lower their federal taxes. Even general partners who are not paying federal income taxes should use this depreciation method since K-1s will reflect lower taxable income to benefit their limited partners.
About the AuthorNick Niesen
Joined: April 29th, 2015
Articles Posted: 33,847
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