Catching Up on Missed Depreciation Deductions

Are you (like most owners of commercial real estate and apartments) missing out on one of the biggest and easiest sources of cash flow available? If so, it’s an easy problem to solve, even if you’ve owned your property for five, ten, or even fifteen years.

More than 80% of my firm’s clients never heard of the opportunity to take accelerated depreciation before I contacted them. After I performed a complimentary analysis of their building’s potential for income tax deferral, they quickly realized they were paying more income tax than required and sacrificing valuable cash flow. The solution: an engineering-based cost segregation study that documents the assets within a property that are eligible for accelerated depreciation. Most buildings contain substantial numbers of these assets.

Better Late Than Never

A cost segregation study performed on a property placed in service in years past when a tax return has already been filed is known as a look-back study. This look-back study will identify costs that were incorrectly classified as 27.5, 31.5, or 39-year property and reallocate them to the appropriate recovery periods; typically 5, 7, or 15-year.

Upon completion, the taxpayer is allowed to make an adjustment under IRC §481(a) to catch up on depreciation. The catch up, which is taken in the year the cost segregation study is applied, is equal to the difference between what was actually depreciated and what could have been depreciated if a cost segregation study was performed when the property was first placed in service. The benefits can be dramatic. Additionally, the change can be made without filing an amended return. The taxpayer simply files Form 3115 (Change in Accounting Method) with the cost segregation study attached.

The IRS permits taxpayers to use cost segregation studies to adjust deprecation on properties placed in service as far back as January 1, 1987.

Examples

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Additional depreciation expense in earlier years reduces income tax during those years and creates additional after-tax cash flow which may be used for any purpose. Applying cost segregation immediately after acquisition or construction is optimal, but applying cost segregation retroactively is allowed without amending past tax returns and can be highly rewarding.

WHAT TO DO

Do you own or manage in commercial real estate or apartments with an initial cost basis (net of land) of at least $1 million? If so, and if you have not yet looked into cost segregation, take a closer look to see if you can use it to significantly improve your cash flow.

Learn more by reading/watching the following, then contact Jeff for a complimentary benefit analysis:

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About the Author Jeff Glass

Jeff helps real estate owners increase their cash flow. He started his career as a Financial Analyst with the Irvine Company, and worked in various management/executive positions in the mortgage industry for many years. He's been a Cost Segregation consultant for several years and is considered one of the industry's top experts in TPRs. As Director of Business Development for Bedford Cost Segregation, Jeff helps his clients increase cash flow by accelerating their depreciation deductions, and by writing off assets that no longer need to be depreciated under recently changed tax rules. Jeff has a B.S. in Economics from Claremont McKenna College and an MBA with an emphasis in Finance from UC Berkeley.