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How to Structure a Self-Storage Acquisition: 4 Ways to Maximize Your Tax Benefits and Cash Flow

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By Joe DeSantis

The most important negotiating point in the purchase a self-storage facility isn’t just the price of the property but the structure of the acquisition. A proper structure will provide the new owner with the maximum tax benefit and cash flow. The structure needs to be outlined in the closing document and must include a value for each of the following categories:

  • Land
  • Building/improvement
  • Furniture/fixtures/equipment (FFE)
  • Goodwill/intangible

Let’s take a look at each category and how to determine the value for each. First, we must review the total cost to be capitalized.

Capitalized Costs

The starting point for the transaction isn’t the just the selling price; it includes other costs that were facilitative to the acquisition. The IRS recently released tangible property regulations (TPR), which provide guidance as to what gets capitalized. For example, investigation costs generally aren’t facilitative; but typically, all costs after an initial bid has been submitted are facilitative and must be capitalized.

Costs that are inherently facilitative and must be capitalized for a self-storage acquisition are:

  • Appraisals
  • Legal fees to negotiate terms and structure
  • Document preparation that effectuates the acquisition
  • Tax advice
  • Title exam/evaluation
  • Conveying property (transfer tax)
  • Finder’s fees
  • Environmental/engineering services
  • Inspection services
  • Regulatory and permit fees
  • Application fees

The 4 Categories

Now, let’s take a look at the four categories mentioned above and how to determine the value for each.

Land. This isn’t depreciable. To determine what the land value should be, look for guidance from the tax assessment or appraisal.

Building/improvement. This is 39-year depreciable. To determine its value, look for guidance from the tax assessment or appraisal. The language to be included in the closing document should be that the new owner may do a cost-segregation study. This will break down the building/improvement into five-, seven-, 15- and 39-year components to accelerate the depreciation and provide an immediate tax benefit.

FFE. This is five-year depreciable if listed as a lump sum. However, if you have an itemized list of FFE, you can add values on each item and direct your attorney on how to incorporate this into the closing documents. This methodology is new due to the TPR. The entire list may be expensed on day one after the acquisition if done this way. Also, you’ll get a tax benefit when you sell the property since you won’t pay depreciation recapture (25 percent) on the FFE because it was expensed.

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