Submitted to Investment Real Estate by Kevin A. Eisenhart, CPA, MBA, MST, Partner at RKL Tax Services Group
Did you know there may be significant unrealized tax savings in your self storage facility? Strategies like cost segregation, bonus depreciation or Section 179 expensing can produce a number of benefits for facility owners, including accelerated deductions and increased cash flow. Here are the key ways owners can reap more immediate savings from their self storage asset and business expenditures.
Cost Segregation 101
A cost segregation study is a powerful tax saving strategy that revolves around the standard tax depreciation life for buildings. For commercial properties, this lifespan is 39 years.
During a cost segregation study, all the non-structural elements in a commercial building – things like electrical systems, plumbing components and finishes – are identified and reclassified into shorter-lived asset classes like “personal property” or “land improvements.” Rather than depreciating over 39 years, the reclassified elements will instead be eligible for accelerated depreciation typically in the five, seven or 15-year range.
IRS rulings and procedures allow taxpayers to change accounting methods, without amending past tax returns, to take advantage of these previously understated depreciation expenses. Accelerating depreciation on your self storage investment produces larger tax deductions and less taxes in the early stages of a facility’s life, which increases cash flow that can be used to meet current needs or reinvest into your business.
Tax Reform Enhances Bonus Depreciation
Once cost segregation is applied, self storage owners can also reap the benefits of bonus depreciation by applying it to the personal property and land improvements identified in the study. Tax reform enhances this benefit, thanks to the provision of the Tax Cuts and Jobs Act (TCJA) that doubled bonus depreciation from 50 to 100 percent for assets acquired and placed into service after September 27, 2017 and before January 1, 2023.
In addition to the doubled rate (which reduces by 20 percent annually after 2023), tax reform also expanded the types of property eligible for bonus depreciation. For the first time, these benefits are extended to used property, in addition to brand new assets. The retroactive application back to September 2017 plus the widened eligibility allows self storage facility owners to get twice the value from writing off qualified purchases.
Section 179 Limits Increased
Another way self storage owners can garner more immediate savings from business expenditures is through Section 179 expensing. Section 179, also known as the Small Business Asset Expensing Election, lets owners immediately expense the full purchase price of eligible software, equipment and leasehold improvements, rather than capitalizing them and waiting for depreciation.
Just like bonus depreciation, Section 179 has become an even more attractive option for self storage owners thanks to tax reform. Effective January 1, 2018, the TCJA increased the Section 179 limit to $1 million from the previous $520,000. The law also raised the phase-out threshold from $2.07 million to $2.5 million, which means the expensing amount is reduced dollar-for-dollar if the $2.5 million cap is exceeded. TCJA also broadens eligibility to previously excluded structural components like roofs, HVAC equipment and fire protection, alarm or security systems.
Want to find out how cost segregation, bonus depreciation or Section 179 expensing can benefit your self storage facility? RKL has a deep bench of tax experts dedicated to serving the unique needs of real estate professionals, including self storage. The team at RKL can provide owners with an analysis of potential tax savings for these strategies to help inform business decision making regarding asset purchases or capital expenditure planning. For more of RKL’s tax reform insights, visit our resource center or contact us today.
About the Author:
Kevin A. Eisenhart, CPA, MBA, MST, is a Partner in RKL’s Tax Services Group. Kevin specializes in the taxation of corporations, S corporations and partnerships, including issues surrounding multistate taxation and consolidated return matters. Contact Kevin at firstname.lastname@example.org or 717-843-3804 to start the conversation.