Having trouble raising rents? Is your facility’s cash flow starting to stagnate? Well, how about leveraging your largest deduction, depreciation through the use of cost segregation (cost seg)? A cost-seg study allocates depreciable property to the correct categories in an effort to maximize your allowable depreciation deduction.
Over the last 15 months, more self-storage owners have felt the pinch of the slower economy coupled with new competition. However, relief is available from one of the most unlikely sources: the IRS. If you own or purchased a self-storage facility and have been depreciating it substantially over 39 years, you may be sitting on a financial windfall. Self-storage is a perfect fit for cost segregation since as much as 30 percent of the cost can be classified to accelerated recovery periods. For instance, instead of 39 years, land improvements can be recovered in 15 years. This accelerated depreciation helps owners defer federal and state income taxes.
Cost seg is often looked upon by owners as a competitive advantage that they do not want to share and for good reason. The result of a cost-seg study on a typical 45,000-square-foot facility could double the after-tax cash flow in the current year depending when the facility was originally placed in service.
Cost segregation has been around for many years. It began with the landmark case of The Hospital Corp. of America vs. the Commissioner. This favorable decision opened the door for real estate owners to accelerate depreciation on real and personal property improvements.
It actually gets even better when you consider bonus depreciation and the ability for owners to correct the method of depreciating real and personal property through an automatic change process.
In 2002, the Job Creation and Worker Assistance Act (JCWA) was enacted in an effort to stimulate construction in the aftermath of Sept. 11, 2001. Recently, this temporary provision was re-enacted to allow a one-time deduction of up to 50 percent of the cost of qualified property with a class life of 20 years or less to stimulate business.
For example, if you spent $150,000 on land improvements, you may deduct $75,000 of the cost immediately and depreciate the remaining balance over the normal recovery period. This is a substantial tax benefit that should not be overlooked and will run out this year.