Cost Segregation Give Apartment Owners Tax Relief

Cost Segregation give apartment owners tax relief
Apartment owners can face staggering expenses to​ maintain apartment communities .​
The upkeep of​ even a​ modest community could involve groundskeeping,​ unit renovation,​ and replacements,​ such as​ parking lot asphalt and fencing .​
Another steep expense is​ federal income tax - and in​ some areas an​ additional state tax on​ income - but through an​ innovative study known as​ cost segregation,​ the​ depreciation of​ property components can be used to​ help lower federal taxes .​
Today,​ more apartment investors,​ especially those whose occupancy rates are challenged by the​ nation's single-family housing,​ are taking a​ close look at​ every possible avenue to​ lower costs .​
That's a​ frustrating task in​ the​ apartment business .​
One historically underused technique for saving money,​ in​ this case saving taxes,​ is​ to​ ensure that all depreciable items are reflected accurately on​ tax returns .​
Those items are not limited to​ copiers,​ automobiles and heavy equipment .​
The list extends to​ a​ wide range of​ buildings and improvements .​
In fact,​ the​ IRS recognizes 130 items that depreciate over much shorter time periods than the​ standard depreciation of​ 27.5 years for an​ apartment community .​
Many of​ those items,​ such as​ parking surfaces,​ landscaping and even certain wall coverings,​ are present in​ large proportions on​ typical apartment communities .​
A cost segregation analysis,​ when reflected on​ deprecation schedules,​ reduces taxable income now and also defers taxes on​ capital gain amounts until the​ community is​ sold .​
At that time,​ the​ recapture of​ taxes on​ the​ extra depreciation taken can occur at​ a​ much lower rate than the​ 35 percent max tax rate that was avoided with the​ extra losses .​
Don't forget the​ time value of​ money by deferring that inevitable tax by a​ few years .​
In light of​ the​ 130 IRS-identified short life items,​ this conservative tax-planning tool can help apartment owners allocate more costs to​ five-year,​ seven-year,​ 15-year and 27.5-year improvements versus the​ land value on​ apartment communities .​
Apartment communities,​ according to​ IRS rules,​ depreciate over the​ course of​ 27.5 years .​
This is​ 10 years less than the​ depreciation estimated for office,​ retail and industrial properties,​ which equal quicker savings for apartment community owners .​
Items that are found in​ every apartment,​ such as​ carpet,​ linoleum,​ window treatments and appliances,​ are categorized as​ five-year items,​ meaning that they are typically replaced after five years of​ use .​
Wide Range of​ Applications
Whether the​ community was recently purchased,​ has been owned for a​ while or​ is​ on​ the​ market to​ be sold,​ a​ cost segregation analysis can help at​ any stage of​ ownership by reducing federal income taxes and showing future depreciation .​
The optimum time to​ do this is​ preferably as​ soon as​ ownership is​ taken,​ whether the​ property was bought or​ built .​
Any commercial property built after Dec .​
31,​ 1986,​ is​ eligible,​ and there are catch-up provisions to​ accommodate higher savings in​ the​ first year when a​ cost segregation study is​ completed for communities that have been owned for several years .​
Communities of​ all sizes can benefit,​ from small communities of​ fewer than 10 apartments to​ communities that span several city blocks .​
If the​ property has an​ assessed value of​ at​ least $200,​000,​ the​ cost segregation evaluation can almost always produce substantial federal income tax savings .​
Preparing for a​ Study
A small amount of​ an​ owner's time is​ required when working with a​ consulting firm that specializes in​ cost segregation .​
And it​ is​ advisable for the​ owner's CPA or​ tax accountant to​ collaborate with the​ consultant,​ ensuring the​ most advantageous application for that owner's particular financial circumstances .​
The original purchase price of​ the​ apartment community is​ the​ cost basis,​ so owners receive savings on​ their initial investment,​ as​ well as​ on​ improvements .​
With research that is​ both quantitative (square footage of​ asphalt,​ pavement,​ ect.,​ or​ quantities of​ wall or​ window coverings,​ ect.) and qualitative (judgment of​ remaining life) a​ specialized analysis and calculation is​ conducted before a​ report is​ issued .​
This report becomes the​ backup documentation for federal income tax returns.

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