2022 Tax Strategies That’ll Help Self-Storage Owners Fund Property Improvements

If you’re planning any physical improvements or capital expenditures for your self-storage property this year, there are several tax strategies you can use to save money. Find out what they are and how they’ll help you reduce project expenses and improve cash flow.

Warren Dazzio, Executive Vice President

September 7, 2022

5 Min Read

As a self-storage owner, you know you can save on your annual taxes by claiming various expenses. However, you may be overlooking other significant savings that can generate cash flow and help you pay for facility improvements. Just a little planning could give you access previously undiscovered capital. Following are a few approaches to help you pay for upcoming renovations or other capital expenditures.

The Ratio Test

First, use the ratio text to maximize what you can expense as a self-storage facility repair. The tax code gives very specific guidelines on whether expenditures must be capitalized as an improvement or expensed as a repair. If an item amounts to less than 35% or less of a building system (40% or less for roofs), it qualifies for the latter.

Let’s say you have 300 unit doors at your self-storage facility. Replace all of them at once, and you should capitalize them to stay compliant with the tax laws. However, if you replace only 100 of them, that’s less than 35% of the total “system,” which means you can expense it as a repair. You can use this strategy throughout your facility on things like HVAC, roof, parking lot, gate systems and more.

Partial Asset Disposition

If you’re doing any remodeling at your self-storage property, there are additional tax benefits available to you. For example, a partial asset disposition (PAD) allows you to write down the basis of items that were removed from a building and disposed. This approach can be applied to most self-storage renovation projects.

Typically, building owners capitalize the whole renovation when in fact some portion can often be expensed. Let’s go back to our example of replacing all your unit doors. Some of the doors you throw away may still have value, and the tax code allows you to expense it. You can receive a deduction in the same tax year as the upgrade, but it’s a “use it or lose it” situation. Fail to capture a PAD in the current tax year, and the opportunity for the write-off is gone forever. It can be all about timing, so visit with your tax consultant to verify. This is a true tax savings and not a deferment, as it lowers the building basis.

Another good example is upgrading your facility lights to LEDs. With a little planning, you can capture energy savings and rebates as well as a PAD (by removing the old lights), plus you can often take bonus depreciation when the new lights are placed in service. This reduces the project cost by 40% to 60%!

Bonus Depreciation and QIP

Many self-storage improvement projects will qualify for 100% bonus depreciation, which is another way to capture deductions, decrease taxes and generate additional cash flow. Rather than spread the depreciation over the asset’s defined tax life, all the deductions are available immediately in the first year.

This approach works with items that have an asset-class life of 20 years or less. Most self-storage owners are aware that equipment and appliances qualify, however, interior doors, hallway skins, parking lots and fencing are also eligible. Just take advantage of it now, as 100% depreciation is currently scheduled to be reduced by 20% each year starting January 1, 2023.

Also, pay attention to qualified improvement property (QIP). If you make an interior, non-structural improvement to one of your self-storage facilities that was already in service, it may qualify for QIP and, thus, 100% bonus depreciation. What does this mean?

If you spend $200,000 on interior LED lights, doors and hallway skins, you capitalize this as an improvement, but you can now fully deduct that full amount as a capitalized expense on your current tax return since it qualifies for QIP and bonus depreciation. If you made $200,000 in income and had to pay taxes on that, you can zero out the taxes using the QIP deduction.

Recent tax laws also expanded the definition of Section 179 to include more than equipment or moveable storage buildings. It now includes parts of buildings like roofs, HVAC, fire-protection and alarm systems, and security systems if these improvements are made to non-residential buildings and begun after the structure was placed in service for its intended use.

Section 179 is an annual election that resets each year, but it does have certain limitations. Spend too much, and you reduce the amount you can take. You can use either bonus depreciation or Section 179 as you buy new assets.

Cost Segregation

If you aren’t sure which items at your self-storage property might qualify for Section 179, QIP or 100% bonus depreciation, consider a cost-segregation study. If you include this approach as one of your strategies to help identify bonus depreciation, for example, you can deduct about 20% to 50% of a building in the first year you buy or build it. You can also apply this approach to buildings you’ve owned for a number of years without amending prior tax returns. The result is lower taxes in the current tax year.

Self-storage buildings in particular can benefit from cost segregation and bonus depreciation because items like interior doors, moveable wall partitions, security systems, specialty lighting, landscaping and paving can all be accelerated. Use the time value of money to take those savings and improve your property while gaining additional revenue (interest on the useable depreciation).

A reputable cost-segregation firm can help you identify all available tax-saving strategies and make the most of your savings. They’ll work closely with your accountant or tax preparer to maximize deductions while ensuring you comply with current tax codes.

Don’t overlook tax savings that can provide significant cash flow toward improvements at your self-storage facility. Use the codes to maximize what you can expense, and plan ahead to capture additional deductions through PAD, bonus depreciation, QIP and cost segregation. The tax savings will reduce the cost and possibly pay for your whole project!

Warren Dazzio is executive vice president of Cost Segregation Services Inc., and engineering-based consulting firm that specializes in tax laws surrounding commercial buildings including repair regulations, the Tax Cuts and Jobs Act, cost segregation, and research and development studies. Its energy-services division offers LED lighting projects from new construction to retrofits. To reach him, call 225.241.9823 or email [email protected].

About the Author(s)

Warren Dazzio

Executive Vice President, Cost Segregation Services Inc.

Warren Dazzio is executive vice president of Cost Segregation Services Inc., an engineering-based consulting firm specializing in the U.S. tax code as well as cost-segregation and R&D studies in the United States. He has extensive knowledge of operations, sales and business development in multiple industries. For more information, call 225.241.9823, e-mail [email protected]; visit www.cssistudy.com.

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