Archive for October, 2009
Cost Segregation Cpa
Cost segregation identifies applicable components and establishes the value and correct time line for depreciation. Under typical circumstances depreciation is spread out over as long as 39 years. However cost segregation applies depreciation to parts of the property in 5 7 and 15year increments. This acceleration in depreciation time reduces the income subject to federal income taxes. This method does not dictate alternative minimum tax issues.
Professionals Prepare Detailed Reports
To perform a cost segregation analysis the buildings cost basis for construction renovation and repairs is reviewed. A technician goes on site to take detailed measurements and observe the quality and condition of the property. After the site visit he or she calculates the value of a variety of components using widely accepted pricing resources and local economic conditions. The value of shortlife components is determined by estimating the replacement cost new and then deducting for depreciation. The percentage depreciation is typically based upon age and perceived condition based upon visual observation.
A cost segregation study produces a professional document that is backed by careful research. The results are summarized in a detailed report documenting the amount of 57 and 15year property that qualifies for shortlife depreciation.
Real estate appraisers and engineering firms who specialize have the knowledge to perform the detailed cost segregation studies frequently at the recommendation of the owners tax preparer. The tax preparation expert should be involved before during and after the cost segregation report is prepared to maximize federal income tax deductions. Preparing the study requires expertise in evaluating real estate and complete command of the regulations that detail these depreciation options. Internal Revenue Code regulations outline approximately 130 categories of property which qualify for shorter lives.
Cost segregation regulations are a specialized area of knowledge not familiar to most tax preparation experts. The 5year property includes items such as carpet and vinyl flooring. Sevenyear property may reflect unexpensed office furnishings or cluster mailboxes. Fifteenyear property encompasses paving and landscaping.
Many CPAs Recommend Cost Segregation
Most property owners instinctively believe their CPAs are performing cost segregation for them but research has suggested that this tool is used only 5 10 of the time. CPAs tax lawyersand other tax preparers may not routinely perform the study because it involves real estate appraisal methodology and specialized knowledge outside the scope of a typical tax practice. Even though cost segregation may be unfamiliar territory to some accounting professionals it is highly praised by many accountants.
Cost segregation is a powerful and necessary part of accurately calculating depreciation for real property comments CPA Bill Bandy of Blakely and Bandy a Houstonbased accounting firm. A properly prepared study is invaluable to me as a CPA because it provides reliable support for preparing the depreciation schedule and reducing my clients taxes. Recent changes in tax regulations make cost segregation more attractive and allow it to be implemented years after the completion of a real estate purchase. Commercial real estate owners can generate meaningful federal income tax reduction by using catchup depreciation for buildings acquired or built after 1986. This amplifies the level of tax deductions affecting a large tax cut.
How Does It Work?
Historically most depreciation schedules are split between land and longlife property. Longlife property depreciates over 27.5 years for apartments and 39 years for most commercial properties. A cost segregation study can typically allocate 20 to 40 of the improvement basis to shortlife categories.
Highincome owners typically pay a 35 federal income tax rate on ordinary income and a 15 rate on capital gains. The mechanics of reporting the gain on a sale usually allocates most of the income to capital gains which is taxed at 15. By increasing tax deductions depreciation the commercial real estate owner pays the capital gains tax rate 15 maximum for most income and also defers payment of federal income taxes.
A cost segregation study reduces the amount of longlife property which is recaptured at 25 by allocating more of the basis to the 57 and 15year property. If cost segregation is utilized from inception until a gain on the property is recognized it can reduce the federal tax rate from 35 to 15 for most investors. The exceptions are C corporations which pay the same tax rate for either ordinary income or capital gains.
How Much Can It Save?
The annual tax savings through cost segregation can be significant. The following table summarizes actual firstyear tax savings generated in cost segregation reports prepared by OConnor Associates a national real estate consulting firm.
Property
Type
Range on Year 1 Tax Savings
100000500000 sq. ft. property size
Office
Apartment
Retail
Industrial
35500 160000
19240 96200
36500 182600
10800 54000
A recent client of the firm realized a payback ratio for the first year savings at 4:1 and the payback ratio for the first five years at 20:1.
Who Prepares Cost Segregation Studies Today?
Appraisal and engineering firms Big Four firms and spinoffs of Big Four firms are the primary providers of cost segregation studies. Some accounting firms and tax lawyers offer the service but frequently outsource the actual report preparation to an appraisal or engineering firm. With the introduction of new providers the price gap has widened between lower cost analytical studies and higher rates charged by larger firms.
Do All Properties Benefit From Cost Segregation?
Cost segregation is typically effective and financially feasible for properties that have an improvement basis of 500000 or higher.
Properties with a great deal of siteimprovement including landscaping
and parking generate great results.
Cost segregation can be performed for properties anywhere in the United States. It is effective for apartments office retail industrial selfstorage and many special use properties.
Clients expect us to seek out and utilize tools which will minimize their federal taxes says CPA Sheldon J. Donner of Donner Weiser Associates P.C. an Atlantabased CPA and consulting firm. Cost segregation is an appropriate conservative and cost effective tool to substantially reduce federal and state income taxes. Our clients have been extremely pleased with the results.
When Should I Obtain A Cost Segregation Report?
We routinely obtain a cost segregation study after purchasing an investment property said Jeff Harris chief financial officer of Boxer Properties a national property investment firm. It typically makes sense to obtain a cost segregation report the year a property is purchased or built. Property owners who purchased or constructed property after 1986often can benefit substantially by recouping previously underreported depreciation without filing amended tax returns.
Call Larry Brewster at 1800856REAL7325 for more details.
About the Author
Patrick OConnor MAI is president of OConnor Associates. The firm in business since 1974 specializes in nationwide real estate appraisals research and state and federal tax reduction services. OConnor is frequently acknowledged by national publications as a respected source of information on real estate trends.
OConnor Associates is a national provider of commercial property real estate consulting services including income tax tax deduction property taxreal estate consultingmarket researchcondemnation appraisalshighest and best usecost segregationfinancial modelingGalveston central appraisal districtTips and Tricks for Appealing Your Property Taxes in BrazoriaBrazoria county appraisalFederal tax reduction.
About the writer: Patrick C. O’Connor has been president of O’Connor Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction.
Commercial Real Estate Soars In Chennai
Chennai real estate market is witnessing an unparalleled growth in the commercial sector. The property value graph is showing a constant increase in commercial property values but it is estimated to cross the threshold very soon.
Chennais economic setup and its infrastructure favour both industrial as well as the service sector. Traditional segments like the shipping sector prefer Chennai because of its geographical location. New businesses like the Back office Processing Operations and Information Processing Centres too prefer Chennai to other neighbouring cities since Chennais citys infrastructure favours such activities. In fact the demand for commercial activities surpasses its supply even after a number of commercial projects are under construction. IT companies are fuelling this demand for commercial space in Chennai.
Leading developers and realty majors have launched their new commercial and residential projects to cater to the rising demand. Most of the new projects are on Chennais IT Corridor. Chief locations like Nungambakkam Mount Road Anna Salai Cathedral Road and Dr Radhakrishnan Salai are witnessing maximum appreciation in the property rates. These areas are accessible and are hence preferred by the property builders.
The present commercial capital value of Radhakrishnan Salai is 4500 5000 Rs/ sq ft. This is by far the most expensive commercial area in Chennai. A property booker from Chennai informs that other prestigious commercial localities like Anna Salai and Cathedral Road have capital value of 4200 4500 Rs/sq ft.
Commercial rental values are equally high in these areas and are expected to escalate in the coming years. Rental values for 1000 sq ft space at Radhakrishnan Salai are about 35000 50000 Rs/sq ft. This is certainly high as compared to other places in Chennai. Chennais commercial segment is poised to grow further when all the locations along the IT Corridor become operational.
This is good for the citys trade and commerce but will affect the property rates sharply. Property brokers feel that the best deal is to capitalise on this citys present commercial hubs. These areas are sure to swell in the next five year ensuring good returns as rentals or as capital.
For more details on Chennai Properties log on to magicbricks.com
About the writer: George Gonigal provides you the best and latest information on Chennai Real Estate Builders if you want to Buy Apartments in Chennai. he suggest you log on to magicbricks.com
Commercial Real Estate Financing: Who Controls The Third Party Reports?
Well this weekend marked the official end of the 2008 NFL season with the NFC defeating the AFC in the Pro Bowl in Hawaii. NOW what am I going to do on Sundays??? I guess Ill have to find some useful things to occupy my time like tennis martial arts biking skiing It is going to be HARD until the end of summer but Ill think of SOMETHING. I can always fund some commercial loans which is our specialty! Ive heard that even Fannie Mae and Freddie Mac are limiting cash out now to ZERO dollars. Which make sense since they are losing money faster than the Fed can print it. We still have some portfolio sources for multifamily. If you have a scenario give us a call!
Commercial Financing Tip
Who Controls The Third Party Reports? In light of recent events in the mortgage markets it comes as no surprise that lenders are changing how they handle third party reports. After the Samp;L meltdown in the late 1980s FDIC insured lenders were required to order appraisals and not accept borrower or broker provided ones. Eventually most lenders followed suit.
Now that requirement has been extended to all third party reports particularly Environmental Phase 1 amp; 2 reports. New EPA guidelines and rules are making it harder to avoid liability in environmentally challenged properties where it can be shown that the lender did not exercise proper due diligence with regard to its environmental investigation. Save your money for third party reports until you have applied for a loan otherwise you will be ordering your reports twice.
About the writer: WANT TO USE THIS ARTICLE IN YOUR EZINE OR WEB SITE? You can as long as you include this complete statement with it: The Investment Property Insider is published by Craig S. Higdon a veteran commercial mortgage banker. He publishes the ezine and blog www.InvestmentPropertyInsider.com for commercial real estate investors developers and industry professionals. Visit the blog and get this free report: The 7 Biggest Loan Mistakes Real Estate Investors Make And How To Avoid Them.