Appraisers lower costs for federal tax savings on small property depreciation
Below is a MRR and PLR article in category Finance -> subcategory Real Estate.
Appraisers Cut Costs for Federal Tax Savings on Small Property Depreciation
Summary:
Investors in small and medium-sized properties can now enjoy tax savings through cost segregation, thanks to appraisers who offer more affordable analysis fees, often a third to half of what traditional firms charge.
Keywords:
cost segregation, lower federal income tax, commercial real estate, OConnor
Article:
Investors owning small to medium-sized properties can now access tax savings through cost segregation. Appraisers with specialized expertise offer analysis fees significantly lower than traditional firms?"up to half the cost?"making it more accessible.
A key court ruling established that tangible personal property in an acquisition should follow Investment Tax Credit principles, allowing owners to categorize items as personal property for asset recovery. This enables a faster depreciation of certain property components, as opposed to the standard 39 years for commercial properties or 27.5 years for residential rentals. Approximately 135 components can now be depreciated over much shorter periods of 5, 7, or 15 years.
By increasing the rate of depreciation, property owners lower their taxable income at a rate typically taxed at 35%, shifting more income to the capital gains tax rate of 15% upon sale. This method applies to any improved property.
Previously, large accounting and engineering firms conducted cost segregation studies, usually dealing with large, new projects. Their fees ranged from $10,000 to $40,000, which was prohibitive for small property owners, the largest real estate investor group.
However, a significant shift is making it possible for small property owners to save substantially. Real estate appraisers now employ accepted cost estimation techniques, assessing the remaining life of assets without unnecessary complexity. This streamlined approach reduces fees, yet delivers results matching or surpassing costlier reports?"a method supported by IRS audits.
Appraisers focus on:
1. Property size
2. Property age
3. Affordability
OConnor & Associates, a national real estate service firm, is leveraging these techniques:
1. Properties with an improvement basis as low as $500,000 can benefit, compared to the previous $5 to $10 million threshold.
2. Existing properties built or bought post-1986 gain significant savings without needing original cost documents. Previous methods were usually applied only to new builds.
3. Reports are affordable, often providing a minimum 3:1 return on investment in the first year, with traditional fees ranging upwards of $10,000.
It's crucial to involve a CPA or tax preparer throughout the process. For older properties, the CPA might need to file Form 3115 with the tax return to realize savings on previously undepreciated items, avoiding the need for amended returns.
Even properties valued at $500,000 can achieve a 3:1 return on tax savings over the report's modest cost. After three years, the typical payback ratio can rise to 10:1.
In late 2005, OConnor saw a 100% increase in cost segregation projects. As owners prepare for federal tax filings, more are seizing this chance to reduce taxes. Even general partners not personally paying taxes can benefit from this technique, as K-1s will reflect lower taxable income for their limited partners.
You can find the original non-AI version of this article here: Appraisers lower costs for federal tax savings on small property depreciation.
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