If the taxpayer spends more than maximum allowed, he’s not eligible. This safe harbor will prove to be useful if the amount spent is greater than the maximum threshold under the De Minimis Safe Harbor Election rule of $500 and the taxpayer does not qualify for the Routine Maintenance Safe Harbor.
Qualifying Partial Disposition
If the taxpayer needs to replace a major component such as a roof or HVAC system, the proposed regulations allow him to write off the adjusted basis of the qualifying property. In the past, we were required to depreciate both the new and old components for the remaining life (up to 39 years). By taking the write-off immediately, you’ll reduce your taxable income and have more money on hand for the replacement.
Also, all costs associated with the removal of the legacy roof or HVAC system do not require capitalization since they don’t enhance the value of the replacement. There are specific procedures and elections that must be followed in terms of identifying the basis of the retired property, which your accountant must follow.
Cost segregation has long been used by self-storage owners as a competitive advantage. The benefit of a properly completed cost-segregation study will translate into a significant reduction in federal and state income taxes.
Self-storage facilities make ideal candidates for cost-segregation studies due to the vast amount of site work. Improvements such as paving, sidewalks, storm-water drainage, curbing, fencing, etc., are specifically identified as a separate asset category with a reduced life (15 years) compared to a building, which is recovered over 39 years. Furthermore, there are other systems that can be depreciated over five- and seven-year periods, such as site lighting, movable partitions, security, access gates, computerized locking or alarm systems, etc.
The IRS encourages owners to use cost segregation by allowing them to modify the recovery period through the automatic-change procedure. The best thing about this is it allows the taxpayer to claim catch-up depreciation. This is the depreciation that could have been claimed in prior years had cost segregation been used since the original placed in-service date.
How much can you save with cost segregation? An owner of a 45,000-square-foot, single-story facility with depreciable costs of $62 per square foot (total of $2,790,000) can expect as much as 30 percent to be allocated to shorter recovery periods (15, seven and five years) instead of recovering the entire amount over 39 years. The tax affected reclassification is discounted at 6 percent, which yields a benefit of $130,000 over 15 years. The $130,000 represents additional investment income as a result of the deferment of taxes.
A brief discussion with your accountant could unlock the tremendous benefits available under the new and existing regulations. Doing it improperly may be costly.
Mark de Stefanis is president of Construction Cost Recovery Inc., headquartered in White Plains, N.Y. The firm specializes in such services as cost segregation with a focus on self-storage. To reach him, call 914.740.1995; visit www.ccrtaxaudit.com .