Submitted to Investment Real Estate by Warren Dazzio & Don Little at Cost Segregation Services, Inc.
The Tax Cuts and Jobs Act and the Tangible Property Regulations (TPRs) have brought about major reform in the tax laws for all building owners, especially self storage owners. Below are several strategies to maximize deductions and lower your income taxes creating $30,000 to $80,000 in additional cash flow in the first year of ownership.
Self storage owners typically like to expense everything. The newly revised TPRs were designed to create consistent methods on what to capitalize and what to expense for all tax payers. When expensing is not allowed, here are ways to maximize depreciation.
- One of the tax reform changes providing the biggest bang for the buck is bonus depreciation. Bonus has been increased up to 100 percent and applies to qualifying property that is bought, built or improved upon after September 27, 2017. The newest change makes 100% bonus applicable to newly purchased property. Clearly congress is trying to stimulate the buying and selling of buildings.
- The alternative to straight-line depreciation is accelerated depreciation through a cost segregation study. An engineered-based cost segregation study can identify those items with a twenty-year class life or less (typically 5,7 or 15). This generates a depreciation expense to offset income and provide tax savings on an individual owner’s income tax return. How much tax savings? Generally, $30,000 to $80,000 in income tax savings per $1 Million in building cost can be generated over five years by a cost segregation study. This can be applied to new or old buildings.
- The Tax Cuts and Jobs Act made it so that anyone who buys, builds or improves a property after September 27, 2017, captures these same savings in the first year of ownership. Once a cost segregation study identifies the items allowable for accelerated depreciation, 100% bonus depreciation is then applied. Rather than the above cash benefit being spread out over five years, 100% bonus allows owners to depreciate any item with a class life of 20 years or less in the first year of ownership. Self storage owners can accelerate items like interior doors, moveable partitions and parking lots.
- Did the owner Renovate or remodel? Did the owner replace a roof or switch to LED lighting? A partial asset disposition (PAD) allows a write-down of the basis of assets that were removed. What is thrown in the trash or abandon in place still has a value that can be captured. Many people make renovations but very few people capture this allowable benefit. Owners can receive an expense in the same tax year as the renovation, but it is a “use it or lose it” opportunity. Fail to capture a PAD in the current tax year and it is a lost opportunity. Additionally, tax reform allows most new improvements added during a renovation to qualify for 100% bonus.
- The Tax Code also gives very specific guidelines on whether expenditures should be capitalized as an “improvement” or expensed as a “repair.” Owners may be capitalizing something that the tax code allows them to expense. These same regulations allow owners to apply today’s regulations to the past in a “look back” at prior years. This may allow an owner to expense large deductions in the current tax year if the regulations define them as a “repair”.
Tax Reform made other changes like increasing the limits of section 179 from $500,000 to $1 Million and allowed 100% bonus depreciation for Qualified Improvement Property (QIP). QIP has now replaced leasehold improvements, retail improvements and restaurant improvements. There are some changes to what is allowed in 1031 exchanges and carryback loss restrictions. It is important to discuss with a CPA the specifics of an owner’s situation and how tax reform applies.
Take advantage of these tax strategies. Informed building owners have used these strategies for years. A reputable cost segregation company partnering with a tax professional can substantially lower your taxes and make all this easy for owners.
If you have questions about tax reform and how it affects self storage or would like more information, you can visit CSSI’s website.
You can also get a Free Predictive Analysis Report on any of IRE’s current listings if you are interested in purchasing a self storage asset! Their team of professional brokers can help you secure this free report, simply contact IRE today for more information.