Appraisers Lower Costs For Federal Tax Savings On Small Property Depreciation

Appraisers Lower Costs For Federal Tax Savings On Small Property

Appraisers lower costs for federal tax savings on​ small property depreciation
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 .​
Prices for those analytical reports,​ usually in​ the​ $10,​000 to​ $40,​000 range,​ were out of​ reach for owners of​ small properties,​ especially those holding less-than-new assets .​
Unfortunately,​ those owners representing the​ largest segment of​ real estate investors in​ the​ country were mostly overlooked by previous providers of​ cost segregation services .​
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 .​
2. Existing properties built or​ purchased after 1986 offer significant savings in​ year-one of​ cost segregation,​ even without producing original cost documents .​
Capturing non-segregated depreciation from prior years is​ perfectly allowable by the​ IRS .​
This compares to​ firms previously applying the​ methodology only to​ new construction .​
3. Fees are no longer prohibitive .​
To prepare an​ analysis and report for many small properties,​ prices are low enough to​ generate at​ least 3 times the​ report cost in​ the​ first year .​
This compares to​ the​ traditional fees ranging from $10,​000 to​ $20,​000 and up for comparable size properties.
It is​ wise to​ keep the​ owner’s CPA or​ tax preparer abreast throughout the​ process .​
For older properties,​ the​ CPA may need to​ complete a​ Form 3115 to​ submit with the​ tax return so the​ owner can realize savings on​ items not previously depreciated - without filing an​ amended return .​
Income producing properties worth as​ little as​ $500,​000 can achieve a​ 3:1 payback ratio of​ tax savings over the​ modest price of​ a​ cost segregation report .​
If owned for 3 or​ more years,​ the​ typical payback ratio is​ 10:1 .​
In late 2018,​ O’Connor’s pipeline of​ cost segregation work was up more than 100% .​
As owners are preparing for 2018 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.

Appraisers Lower Costs For Federal Tax Savings On Small Property

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