Tag Archives: tax reform
Let’s look at how cost segregation can increase cash flow for commercial properties. Have you recently built, purchased, expanded or renovated a commercial property? If so, there may be significant untapped tax savings in the property or facilities. A cost segregation study can unlock those savings through greater tax deductions, accelerated depreciation and increased cash flow. Here’s how it works: Portions of a new or existing building are reclassified as “personal property” or “land improvement.” This cost classification can be depreciated over a shorter five, seven or 15 year period as opposed to the standard 39-year depreciable life of a commercial building.
What if you built, renovated, expanded or purchased a building in prior years? Cost segregation is still an option. The IRS allows taxpayers to change prior accounting methods to take advantage of these previously understated depreciation deductions. This can be done without amending tax returns and can generate a relatively large tax deduction in the year of change.
TAX REFORM MAKES COST SEGREGATION MORE VALUABLE THAN EVER
The tax benefits of cost segregation are even greater thanks to tax reform’s enhancement of bonus depreciation.
In general, bonus depreciation is applicable to depreciable business assets with a recovery period of 20 years
or less. Tax reform doubled bonus depreciation from 50 to 100 percent for qualifying property with acquisition
and in-service dates between September 27, 2017 and December 31, 2022. This means that 100 percent of
qualifying costs would be fully depreciated and recognized in year one and only the remaining building cost
would depreciate going forward over 39 years. After 2022, the bonus rate decreases by 20 percent annually,
so the time to act is now.
REAL RESULTS FOR REAL PROPERTIES
RKL performs over 80 studies every year for companies in a variety of industries, including rental real estate, office buildings, hotels/motels, golf courses, auto dealerships, manufacturing facilities, warehouses and more.
Here are two recent examples to demonstrate cost segregation can increase cash flow.
• Construction of a new hotel facility in 2018: Of the total project cost of $13.5 million, RKL identified $5 million as personal property and land improvements. This cost segregation combined with enhanced 100 percent bonus depreciation a present value of the tax savings of $958,000 (using a 37 percent federal tax rate and six percent discount rate), with projected additional depreciation deductions of $4 million for a tax savings of $1.5 million.
• Turn-key construction of a new medical office in 2017: Of the total project cost of $2.4 million, RKL identified $1 million as personal property and land improvements. This cost segregation combined with enhanced 50 percent bonus depreciation produced a present tax savings of $200,400 (using a 42.67 blended tax rate and six percent discount rate), with projected additional depreciation deductions of $695,000 over the next seven years. This will produce tax savings of $296,500 over that seven-year period with $233,200 in the first year alone.
• 2018 look-back study for a previously purchased office/distribution warehouse facility: RKL identified $326,200 of the original $1.375 million building cost as personal property and land improvements. This resulted in a one-time additional depreciation deduction in the current year’s tax return of $170,700. To obtain an analysis of potential cost segregation tax savings, contact RKL today.
FOR MORE INFORMATION CONTACT:
Let’s look at how the recent tax reform bill impacts commercial real estate. The Tax Cuts and Jobs Bill was signed into law on 22 December 2017. The tax reform bill is one of the most substantive changes to the tax laws passed in over 30 years. With the current administration’s background in commercial real estate and understanding of the challenges in the industry, it’s no surprise that certain provisions would be included that might help propel real estate development and commercial real estate transactions. Here’s a quick summary of a few of the critical pieces that affect the commercial real estate business. This isn’t a full compendium or review of the bill and it’s not tax advice but it will help guide you in developing some strategies to take advantage of these laws with your CPA in 2018.
Tax Reform Bill Lowers Taxes on Pass Through Corporations
Pass-through businesses—partnerships, S-corporations, and limited liability companies—are corporate entities that allow business income to “pass-through” to the owner, thereby paying a personal income rate, as opposed to a business rate. For most this is a tax cut from 40% down to 25%. So, let’s say you have a rental income entity organized as an LLC, this new regulation could be significant tax savings to you. Also, be sure to ask your accountant about the “Corker Kickback” which further amplifies this benefit through a 20% deduction subject to income thresholds.
Tax Reform Bill Offers Tax Deductions for Property Developers:
New provisions allow developers to deduct interest expenses for a variety of real estate activities, including construction, management, and property development. This should help developers free up some necessary cash to keep projects moving.
Tax Reform Bill’s Impact on 1031 Exchanges
Like-kind exchanges enable owners of property to sell at a large capital gain but defer any tax as long as they use the proceeds to buy some other property. In essence, owners of commercial real estate can keep flipping the properties until they die without ever paying any capital gains tax. (And if the estate tax is abolished, the gains might go untaxed forever.)
Tax Reform Bill’s Impact on Carried-Interest
There was lots of talk that the “carried interest” loophole would be closed for hedge fund managers. Carried interest essentially allows for taxation at lower capital gains rates rather than ordinary income rates for assets held at least one year. The new reform changes the hold period to three years but this won’t affect most hedge funds as the average hold on assets is three years.
In the real estate context, the change doesn’t make much difference to investors who have a long-term hold strategy. However, for real estate investors who operate on a fix-and-flip strategy this could affect you directly.
There are more aspects in this tax reform bill that are favorable to real estate investors and you should be consulting your CPA as soon as possible to start planning for 2018 if you haven’t already. While every action has an equal and opposite reaction, most experts agree that these new regulations should spur additional investment in the commercial real estate sector from development through purchase of real estate for rental income purposes.
For more information, contact:
Marc Snyderman, Esquire
923 Haddonfield Road, Suite 300
Cherry Hill, NJ 08002
Antonella Colella, Esquire
150 Monument Road, Suite 207
Bala Cynwyd, PA 19004