Cost Segregation Increases Cash Flow for Self-Storage

Mark de Stefanis Comments
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Change of Accounting Method

The IRS allows owners to modify the recovery period from an incorrect method to a correct method through an automatic procedure, thus encouraging owners to depreciate real and personal property correctly. The best thing about this change is it allows you to claim catch-up depreciation, which could have been claimed in prior years (back to 1987) had cost seg been used.

A successful cost-seg study requires:

  • A detailed analysis of the hard and soft construction costs
  • A review of construction drawings and specifications (if available)
  • An inspection of the improvements to identify construction means, methods and use
  • An understanding of specific building, mechanical and electrical systems
  • A detailed knowledge of the tax code as it applies to cost segregation
  • Combined with the ability to understand the tax and financial issues involved with real estate

Self-storage facilities make ideal candidates for cost-seg studies due to vast amount of site work required for construction. Site work such as paving, sidewalks, storm-water drainage, curbing, fencing, security lighting, underground utilities, etc., is specifically identified by the IRS as a separate asset category with a reduced life (15 years) compared to a building that has a recovery period of 39 years. Furthermore, there are other systems that can be depreciated over five- and seven-year periods, such as movable partitions, security, access gates, computerized locking or alarm systems.

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