A cost-seg study does not replace the accountant’s role in preparing your tax return. However, it does provide your accountant the correct values to calculate depreciation.
Let’s take a typical 45,000-square-foot single-story self-storage facility. The depreciable basis is the hard and soft costs associated with the building, site work and personal property. Let’s say the hard and soft costs total $48 a square foot for a depreciable basis of $2.1 million. Based upon our experience, 30 percent of the depreciable basis can be re-categorized to shorter recovery periods (15 years, seven years and five years) as compared to all of it being depreciated over 39 years. This reclassification tax affected at 45 percent and discounted at 6 percent yields the taxpayer a tax benefit of $107,000 over 15 years. The $107,000 represents investment income as a result of the deferment of taxes.
Once cost seg is understood by owners and their accountants, the question becomes, “Why would you not consider it?” If you acquired a facility after 1986, are planning to buy a facility or embarking on a building program, cost segregation and the bonus depreciation available under the temporary regulations should be part of your strategy to increase and improve cash flow and reduce ongoing expenses.
Mark de Stefanis is president of Construction Cost Recovery Inc., headquartered in White Plains, N.Y. The firm specializes in services such as cost segregation with a focus on self-storage. He can be reached at 914.694.3800.