Real property owners are not unlike other investors, always looking for ways to reduce income taxes. As we all know, depreciation and amortization are non-cash tax deductions which help a property owner shelter some of his/her income and help match cash flow with taxable income. The first few years of ownership may be the most critical since this is the time you might be making capital improvements to your property in order to maximize its rent roll. This may also be the time you will be incurring leasing commissions and other expenses to lease up your property and decrease the vacancy rate. Since these years are so critical, wouldn't it be nice to be able to reduce your taxable income and free up tax dollars?
Prior to the 1986 Tax Act, there existed a concept called component depreciation. Component depreciation permitted a taxpayer to allocate the cost of real property among its various components and assign useful lives to each component and depreciate each component based on its useful life. Back in 1986 buildings were depreciated over 19 years. The 1986 Tax Act re-vamped the way taxpayers depreciate their assets. It created the MACRS System for depreciation and did away with component depreciation. Under MACRS, each type of asset is assigned to a class and the class dictates the life to be used for depreciation purposes. Under the MACRS System, residential buildings were assigned a class life of 27.5 years and commercial buildings 31.5 years, until 1993. In 1993, the Internal Revenue Service (IRS) changed the class life for commercial buildings from 31.5 years to 39 years. As a result of these changes in the tax law, a real property owner could only allocate the purchase price between land and building and not to other improvements to their property. Anchin, Block & Anchin has been at the forefront of cost segregation studies. We have performed hundreds of studies valued in excess of $1.5 billion throughout the United States, resulting in $10’s of millions of savings to our clients.
- Cost Segregation GuideJanuary 1, 2014
What is Cost Segregation? As a result of a tax case, Hospital Corp. of America, et al. v. Commissioner, 109 TC 21, Code Sec. 168, significant