Tax Savings Via Depreciation and Cost Segregation
About This Episode:
In this episode, Lance Edwards’ guest is Todd Strumpfer, Senior Account Executive with Cost Segregation Services, Inc. They discuss the tax savings benefits of depreciation and cost segregation.
Guest Speaker: Todd Strumpfer
Todd Strumpfer is a Senior Account Executive with Cost Segregation Services, Inc. He was been with the company for 11 years. If you own commercial property or residential rentals, his services will dramatically reduce your tax liability – and thus increase your tax flow. Cost Segregation allows you to depreciate your building more rapidly to get the tax deductions now rather than later.
His company partners with tax professionals to do Engineering based Cost Segregation. It has completed over 20,000 studies in all 50 states for clients who own hotels, office buildings, retail buildings, warehouses, self-storage facilities and other types of buildings.
What you’ll learn in this episode:
- Todd explains the basics of depreciation, that properties wear out and lose value over time. You invest in a property so it will go up in value, and it typically does. But for tax purposes, the IRS allows for depreciation. Depreciation is a non-cash expense. At tax time, it’s good to have many expenses because that will lower your tax liability.
- The typical way to get a depreciation expense without cost segregation is “straight line depreciation.” On a typical non-commercial building, you start with the purchase price (say, one million dollars). They divide that by 27.5 years and that will be your depreciation expense per year for that length of time.
- Lance calculates that the annual deduction expense on a million-dollar property is $36,363. If you’re in the 30% tax bracket, you multiply by 30% and that means $10,800 in tax savings
- Cost Segregation has been around since the late 90’s. Multiple businesses argued that elements of their property wear out faster than 27.5 years (and 39 for commercial properties), so they should be able to depreciate building components more rapidly. The IRS allows you to depreciate pieces and parts of your property more rapidly provided that you get a study done on your building. Some can depreciate over five years, others over seven and 15. The average building will have 50-70 pieces that can be accelerated.
- The Tax Cuts and Jobs Act allows for any property built after September 27, 2017 to qualify for a 100% bonus appreciation. That means, if a cost segregation study was done during the first year of ownership, the owner would get that tax benefit over the first five years they owned it. With the bonus depreciation, if any building component identified with a life of 20 years or less gets pushed forward to the first year.
- As a rule of thumb, on average, Todd says that for every million dollars of building cost, the owner will likely save $70,000 on their income tax. If you close on a property December 31, 2020, you get all the tax benefit. Lance says, “Buy yourself a building between now and the end of the year and wipe out your taxes.”
- With the COVID-19 related CARES act, there’s a possibility that if you’re a real estate professional, rather than taking it forward, you can actually go back if this creates a loss because you have more depreciation expense. If it offsets your income to the point where you’ve got an operating loss, you can go back five years and move forward – and you can actually get a physical check back.
- If you bought a property after September 27, 2017 and didn’t know about the 100% bonus depreciation, you can “go back in time” and get a deduction. If you’ve already filed a return with that property for several years, you can fill out a 3115 Form (Change in Accounting Method Form). Cost Segregation Services could do the study and that form will catch them up on the depreciation they could have had if they had done cost segregation from the start.
- Todd discusses the difference between accounting-based cost segregation and engineering- based cost segregation. The engineers and analysts at Cost Segregation Services will generally find a lot more benefit than a CPA.
- There is a quick 24 hour turnaround time to give a free estimate on a building owner’s tax savings once Cost Segregation Services has the basic information – what the use of the building is, how long they’ve owned it, what they paid for it.
- To do a cost segregation study, engineers do a site survey. The IRS requires interior and exterior photos of the property. If it’s available, they also gather a floorplan drawing or blueprints of the property. Sometimes the toughest part is to get the building cost basis without land. Once they have all the info, it takes around six weeks to get everything done.
- Different cost segregation firms set different minimum value rates. It can range from $500,000 down to $150,000 because of the 100% bonus depreciation with all that getting pushed forward. Cost Segregation Services can also do a cost seg study on leasehold improvements, say for dentists and doctors who lease a space but who have paid $150-200,000 to build it out the way they want it.
- Todd discusses a few reasons not to get a cost seg analysis, for instance, if there is no tax liability yet or if it’s a new business. If you don’t have a tax liability you don’t need more expenses to offset that. Another reason would be if you’re planning to flip the property. There is something called “recapture,” where you give back a lot of the benefit from cost seg once you turn around and sell it. You should hold the property three years or more to get the most benefit from cost segregation.
- Todd likes to keep things simple and suggests anyone who thinks they can benefit should get a free estimate. “There’s no harm in getting the numbers and seeing what they look like.”
Resources:
www.bestcostsegregationservices.org
Email: Todd.Strumpfer@CostSegregationServices.com
Email: ToddStrumpfer@gmail.com
You can reach Todd directly at: 888-303-4874
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