I recently completed several cost-segregation studies of self-storage properties (see Table 1). It is important to note that these studies generate opportunities to use first-year bonus depreciation by identifying property components with recovery periods of 20 years or less. The second property listed in the table took advantage of the 50 percent first-year bonus depreciation to generate tax savings of $208,834 in the first year. Not all properties are eligible for this lucrative incentive. Cost-segregation specialists can identify opportunities for these and other special cases.
Table 2 illustrates the annual depreciation deductions for the first facility in Table 1. The total additional depreciation of $734,721 over the first five years generated tax savings of $299,990 during the five-year period. The annual change in depreciation over the life of the property is included in the accompanying chart.
To see the image, "Self-Storage Acquisition: Additional Depreciation and Tax Savings Over the Life of the Property," click HERE.
Although the best time for a cost-segregation study is when the self-storage property is acquired or constructed, it’s also possible to obtain these benefits for properties that have been owned for up to 15 years. A retroactive study can be performed without amending prior-year tax returns. You can claim the difference between the allowed depreciation and what you actually claimed in prior years all on your current tax return.
The third property listed in Table 1 is an example of a retroactive study. The first-year tax savings are usually tremendous—in this case, $251,851 for the 2010 tax return.
It’s important to note that a cost-segregation study is typically economically feasible for properties with a depreciable cost basis greater than $1 million and should be considered by any self-storage owner who has recently acquired property, started or completed a construction project, or acquired property within the last 15 years that didn’t already have a study performed.
Cost-segregation professionals make it simple to determine if a property is a candidate for a study. Based on a brief discussion with you or your accountant, they can provide a free projection of benefits and projected depreciation schedule so you can see how it will affect your tax return.
Jerome H. Kootman is managing tax director for Cost Recovery Solutions LLC, a specialized engineering and tax consulting firm that provides cost-segregation services. He has completed cost-segregation studies for hundreds of clients, ranging from small businesses to Fortune 100 companies. He can be reached at 732.548.3855; e-mail firstname.lastname@example.org .