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Can a Real Estate Investment Trust ("REIT") benefit from a Cost Segregation Analysis?

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Peter J. Scalise
Yes, a Real Estate Investment Trust (hereinafter "REIT") can potentially benefit from a cost segregation analysis. I would wholeheartedly recommend scoping the cost segregation opportunities on a property by property basis to assess the potential tax savings.

As a reminder, pursuant to I.R.C. § 856 and the corresponding treasury regulations, REITs (e.g., regardless of whether structured as a Traditional REIT; UP-REIT; or DOWN-REIT) are tax-free entities at the federal level if they adhere to and satisfy the yearly income and asset tests amongst other requirements. However, REITs are taxable at the multi-state level. When utilizing cost segregation analysis coupled with state and local property tax abatement planning, a paradigm shift occurs from a tax planning strategy that merely encompasses a temporary / timing based difference (i.e., accelerating depreciation deductions through cost segregation analysis) to a tax planning strategy that now encompasses a permanent based difference (i.e., state and local property tax abatements).

As an overview, a Cost Segregation Analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 or 39 years) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, 7 or 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). By accelerating the accumulated depreciation deductions the overall cost basis of the property will be reduced which then potentially enables a state and local property tax abatement resulting in the reduction of your blended multi-state tax rates for both tax accrual and tax return purposes.

For complete legislative updates from Capitol Hill and coverage of the latest statutory, administrative, and judicial interpretations please follow Peter J. Scalise at: www.taxconnections.com/profile/Peter-J-Scalise/12259077
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