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It’s Tax Season! Learn How Cost Segregation Can Help Self-Storage Owners Minimize Their 2021 Liability

Tax season is now, but the good news for self-storage owners is it isn’t too late to reduce your liability. A cost-segregation study and partial-asset disposition can help maximize your filings this year. Read how.

Heidi Henderson

February 18, 2022

3 Min Read
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Well, it’s that time of year again. Tax season has arrived, and April 15 is quickly approaching. Soon, it’ll be time for self-storage owners to file their 2021 taxes. The great news is it isn’t too late to reduce your liability and maximize your filing. Let’s examine why the cash windfall of a cost-segregation study and partial-asset disposition for disposed assets can be a smart strategy.

Why Cost Segregation?

Here’s an amazing fact: A cost-segregation study can enable a self-storage owner to write off up to 35% of their facility’s original purchase price in the first year. This is because a storage building is more than a single piece of property; it’s comprised of subcomponents, such as lighting fixtures, heating and air-conditioning systems, and others that deteriorate over time. While an entire commercial building is viewed as having a 39-year depreciation lifespan, its subcomponents are seen as having a five-, seven- or 15-year lifespan, which makes the deduction larger, especially in the first few years.

The 2017 Tax Cuts and Jobs Act allows for an immediate deduction of the full cost of a building’s original purchase price in the first year. A cost-segregation study carves out certain qualifying portions of the building into five-, seven- and 15-year lives. Here are some examples of how that works:

  • 39-year property: Windows, walls, doors, roofs, HVAC systems, plumbing, electrical fixtures

  • 15-year property: Exterior improvements such as fencing, signage, asphalt, curbs, landscaping and lighting

  • Five-year property: Carpeting, appliances, specialty lighting, woodwork, unit partitions, individual unit locks, security, business-specific heating, ventilation systems

Items that can be reclassified include:

  • Site improvements (landscaping/parking)

  • Light fixtures

  • Branch wiring

  • Special plumbing

  • Flooring

  • Millwork

  • Millwork window coverings

  • Partition walls

  • Cabinetry

  • Furnishings

  • Shelving

  • Wall coverings

A cost-segregation study not only creates an immediate increase and cash flow and a reduction in the owner’s tax liability, there’s a deferral of taxes and the ability to reclaim “missed” depreciation deductions from prior years (without having to amend tax returns).

Reduce Your Liability Now

Here are four ways cost segregation and partial-asset disposition can help self-storage owners mitigate their tax liability—right now—for 2021 returns, which will be filed this year:

  • You can commission a cost-segregation study now and apply the resulting tax savings to your 2021 return, even though the calendar year has ended. The only stipulation is the study needs to be complete before your return is filed.

  • You don’t need to amend your tax return to claim the deduction.

  • Even if you can’t use all the depreciation award now, it’s best to apply the study and claim bonus depreciation now. Otherwise, you’ll lose the ability to elect bonus depreciation, and any losses will carry forward anyway. Consequently, it’s better to do it now than to wait.

  • Partial-asset disposition is an Internal Revenue Service deduction in which property owners can report a loss on disposing a portion of a building when they make significant improvements, which includes replacing or ripping out existing components. However, it can’t be claimed retroactively. If you undertook improvements and replaced structural components last year, and you want to write off the cost of those demolished assets, you must perform an improvement study before filing your 2021 taxes. If you don’t, you’ll lose out.

It isn’t too late to offset your coming 2021 tax liability. If you own self-storage, a cost-segregation study can dramatically cut your bill. Your return on the investment might surprise you! In today’s uncertain economic environment, there’s no need to expend more capital than necessary.

Heidi Henderson is executive vice president of Engineered Tax Services, a licensed engineering firm focused on specialty tax services relating to federal tax incentives and strategies for real estate owners. She has more than 25 years of tax and accounting experience in the real estate finance, development, construction and commercial property sectors. To reach her, call 801.689.0325; email [email protected].

About the Author(s)

Heidi Henderson

Executive Vice President, Engineered Tax Services

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