There are two reasons why a cost segregation is beneficial to a self-storage owner:
- Self-storage facilities typically have extensive site work such as paving, curbing, fencing, lighting, retaining walls, storm drainage and other utilities, etc. These items are specifically identified by the IRS as property that can be depreciated over 15 years instead of 39 years. Furthermore, there are other systems that can be depreciated over five or seven years such as movable partitions, furniture, fixtures and equipment, CCTV security, controlled access gates, computerized locking or alarm systems, etc., to name just a few.
- Due to the recent change in regulations, the detail in the cost segregation can support future write-offs of structural components that require replacement.
Some of you might be saying, “Why hasn’t my accountant told me about this?” Well, maybe the timing wasn’t right, you have enough deductions and do not pay taxes, or your accountant just doesn’t think self-storage is a good candidate. Whatever the reason, it’s not too late if you want to save on tax payments.
Some common questions include: Will this trigger an audit? Do I have to file amended returns? Is this risky or out-on-the-edge accounting? The answer is no to all. Cost segregation is an IRS-approved and sanctioned method for which the IRS has published guidelines.
Repair vs. Maintenance
When it comes to new regulations, we often have to take the good with the bad. The good news is we now have the ability to write off the un-depreciated portion of the old/retired doors. The bad news is we have some repairs and maintenance guidelines that are more complex.
If you ask the IRS, everything must capitalized and then depreciated. If you ask a self-storage owner, everything expended is related to repairs and maintenance. It will not surprise you to hear that simplification wasn’t the priority when drafting the new regulations. Regardless, the following matrix may help:
If you do need to capitalize costs, it’s important to recover it over the shortest period possible. This is where the cost segregation comes into play.
Now self-storage owners have another tool in their tax arsenal to help keep more of the their money. The benefit is similar to raising your monthly rental rates by 5 percent without running the risk of having any tenants move out. With all of the competition out there, the question you should ask your accountant is why don’t either of these strategies work for you?
Mark de Stefanis is president of White Plains, N.Y.-based Construction Cost Recovery Inc. The national firm consists of accountants, architects, engineers and cost professionals who provide value-added services to real estate owners. Services include cost segregation, construction-cost auditing and replacement-cost analysis. For more information, call 914.740.1995; visit www.ccrtaxaudit.com.