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To convey the benefits of cost-segregation studies properly, consider the following examples.
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New hotel construction: Consider a project where total costs to construct are about $10 million. Without cost segregation employed, the hotel-owner would receive benefits in the form of depreciation write-offs equally in the next 39 years. The tax-depreciation expense on average would be about $250,000 annually. In the first five years, the customer would accumulate about $1.25 million.
Employing a cost-segregation study, however, the hotel-owner could yield depreciation benefits of about $3.1 million in the first five years. This upswing in tax write-offs in the first five years would be about $1.85 million. With a combined 40-percent federal and state income-tax rate, the taxes deferred in the first five years amount to about $740,000. The first year alone could yield a net increase in tax depreciation of about $350,000.
Multifamily apartment complex: A standard apartment complex purchased in 2002 for $12 million, exclusive of land, can allocate about 24 percent of the depreciable cost between five- and 15-year depreciable lives. For the property-owner, this means a cash-flow infusion of about $1.4 million to catch up as an additional depreciation item in the current year's tax return. In terms of tax deferral, a 40-percent combined tax rate may yield a tax-deferred benefit of $560,000.
Retail shopping center: For a retail strip center acquired in 2005 for $15 million, exclusive of land, a cost-segregation analysis could allocate an average 22 percent of the depreciable cost between five- and 15-year depreciable lives. The first-year impact to the property-owner is a cash infusion of almost $1.3 million in the current tax year alone. This would be a tax-depreciation deduction beyond what the owner was expecting under the conventional 39-year tax classification. The tax deferral at 40-percent combined rate may yield a tax-deferred benefit of $520,000.
Employing a cost-segregation study can benefit all parties in a commercial mortgage transaction. Granted, certain tax situations may limit some property-owners from gaining cost segregation's full benefits because of profitability, passive loss rules or other issues.
The key ingredient for mortgage brokers is that the acceleration of cash flow can show the lender that borrowers are more liquid than before and have an enhanced cash-flow position.
Note: Nothing in this article should be construed as the dispensing of tax advice. Mortgage brokers and their clients should seek advice from their certified public accountant or financial adviser for information specific to their individual situation.
is the national director of cost-segregation services for Cost Segregation Partners. In the past 15 years, he has been responsible for more than 3,500 segregation projects. Keppel is a nationally recognized speaker in cost segregation and is active in assisting certified public accountants nationwide in establishing the cost-segregation niche for their practice. Keppel is author of Real Estate Cost Segregation: A Practitioner's Guide, published by Thomson Reuters/RIA. Contact him at firstname.lastname@example.org or (904) 662-2514.
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