Under the current depreciation system, the doors on a self-storage facility are depreciated over 39 years. Unfortunately, doors that are replaced at the end of their useful life are only a little over 38 percent (15 years/39 years) depreciated. In the past, the self-storage owner couldn’t write off the adjusted basis on retired doors or any other structural improvement. Furthermore, the new doors also had to be depreciated over 39 years. Therefore, prior to the recent change, an owner was required to depreciate the original and replacement doors at the same time.
Fast forward to life under the new regulations. The IRS allows self-storage owners to write off the undepreciated portion of the retired doors on a current and retroactive basis back to 1986. If you have a 350-unit facility built in 1995, you’re probably depreciating 350 doors that no longer exist. The accompanying chart shows the tax ramifications of a door replacement on a 350-unit self-storage facility.
The time has come to write off all of the abandoned assets that have accumulated over time. If you retire an asset in 2012 or any future years, you will be able to take the appropriate write-off in the relevant tax period. However, the timeframe for taking the writing off on legacy assets (assets retired prior to 2012) will expire on Dec. 31, 2014.
If you want to take advantage of the write-off on a retired structural component, you need to have something in the file to support your position. The IRS recommends a reasonable allocation of cost. The appropriate support is a cost-segregation study that breaks out the individual capitalized components. For those who’ve had a study completed in the past, call your cost-segregation provider and ask which line item in the study relates to the specific retirement. If you haven’t had a cost-segregation study, consider getting one, as it will save you at a minimum of 10 times the fee even before taking into consideration the benefit on a write-off.
Essentially, a cost-segregation analysis allows an owner to depreciate certain types of building components and site improvements over a shorter depreciation recovery period than the typical 39 years generally used for the structural elements of a self-storage facility. The benefit to the owner is simple. By deferring taxes through the use of accelerated depreciation, owners retain more cash. A typical self-storage facility of 45,000 square feet will see a savings between $50,000 and $75,000.