Increase Your Cash Flow Substancially Through Cost Secregation
| | Thursday, August 17, 2006 @ 10:53 AM EDT
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Contributed by: Albert Castro
Albert Castro Properties
Read more archived articles about Tax Strategies
Let me tell you about a windfall tax benefit for commercial building owners. This tax benefit can be used to reduce your taxable incime, increase your cash flow, and use the extra cash to purchase other properties.
For those owners who purchased commercial properties in 1987 and thereafter, the tax law allows you to depreciate a commercial building over 39 years and a residential commercial building over 271/2 years. With an engineering based study, you can now convert a portion of your building components to personal property which can be depreciated over 5 and 7 years. Carpeting is an example of a building component which can be converted to personal property. This results in accelatated depreciation. You can even go far back as the time you purchased the property (up to 1987) to recoup all of that depreciation
that you would have taken if you performed this study at that time. Imagine the additional depreciation and the tax benefit it can bring you.
For this to work, you need to be already paying federal income taxes, the property cost you at least $1,000,000 after 1987, and you intend to keep the property for at least 1-3 years. This applies to all commercial real estate including hotels, medical building, apartment buildings, manufacturing, etc. This will not apply to non- profit organizations.
Let me give you an example of the kind of tax benefit a commercial owner can receive. We just completed a cost segregation study on a 15 million property purchased 5 years ago and they received an additional depreciation of $2,750,000. They were in the 40% bracket and thus received a tax benefit of $1,500,000. Wow! How was this possible? Well approximately 20% of the building components was considered to be section 1245 property (personal property) and therefore qualified for 5 and 7 year depreciation instead of 39 years. You do the math. This benefit can also apply to tenants who have installed over $500,000 in tenant’s leasehold improvements or betterments.
Most commercial owners and accountants are not yet aware of this benefit as there has been recent case law and new IRS regulations. Even if the accountants become aware of this, they do not have the in-house resources to offer it to their clients. The IRS is requiring a detailed and comprehensive cost segregation analysis for this to work. This is generally performed by an engineer witha background in cost secregation. Some companies out there offer what is known as "residual studies" which cherry picks the obvious personal property and does not meet all of the IRS "Audit Techiques Guide". They do not recommend this approach.
We offer an engineer based study which is very through and comprehensive and has been accepted by the IRS. Out of 4500 studies we have done so far, only 6 were audited and they passed. By the way, doing this will not raise a red flag as you will be only changing accounting methods and there is no need to file an amended return.
If you are a commercial real estate owner purchased in 1987 or after, and the proeprty cost you $1,000,000 or over or you are a tenant and spent over $500,000 in leasehold improvements, we offer an initial study proposal at our expense to estimate the amount of tax benefits you can receive.
Now, if you are interested in becoming an associate earning high income offering this to commercial property owners and CPAs, then give me a call or e-mail me.
Note: Al Castro
Sun Sun Corp.
albert.castro@rcn.com
610-758-9378
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