The Basics of Cost Segregation: Tax Benefits for Self-Storage Owners

The government has been steadily handing out money to the banks this year, so you may be asking, “Where is my piece of the pie? My rentals and revenue are down. I’ve been doing everything I can to manage expenses, carefully analyzing day-to-day operations, purchasing and marketing.” Or maybe you’re one of the lucky self-storage owners who haven’t been hit as hard by the recession.

Either way, recent allowances by the Internal Revenue Service aimed at helping small-business owners are being used by many self-storage owners to generate cash flow and improve their financial position.

The IRS recently changed the regulations to allow net operating losses (NOL) to be carried up to five years. This means that if you paid taxes in the last five years and are now operating at a tax loss, you can claim a refund on your previous years’ taxes.

How do you create a bigger NOL that will allow you to reclaim your previously paid tax dollars? The answer is cost segregation.

The IRS also reinstated 50 percent bonus depreciation for new construction projects started after Dec. 31, 2007, and placed in service before Jan. 1, 2010. Property with a recovery period of 20 years or less is eligible.

How do you create more property eligible for this bonus depreciation? Once again, the answer is cost segregation.

What It Is

Cost segregation is an engineering-based approach to identifying assets within a facility that can be reclassified into a much shorter depreciation class than the building itself. Non-residential properties (and everything in them) are generally depreciated using a straight-line method over 39 years. The cost-segregation specialist maximizes the inherent tax benefit by identifying, quantifying and segregating the personal property components of a facility, resulting in depreciable lives of five, seven and 15 years using accelerated depreciation.