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Archive for Bruce Johnson

Depreciation: How To Treat Tax-Exempt Non-Residential Real Estate

Depreciation: How To Treat Tax-Exempt Non-Residential Real Estate

Non-profit tenants are popping up all over, and CPAs are often confused about depreciation of these properties.  We’ve gotten so many questions lately… How do I treat this tax-exempt non-residential real estate?  MACRS or ADS?  What about the associated tax-exempt tangible property? What are the appropriate class lives? Is Bonus in play at all? What about QIP?

Our new Flowchart for Tax-Exempt Use Property can help guide users through the decision-making process.  The two-sided, color-coded layout makes it easy to distinguish non-exempt tangible property (orange side) and non-residential real estate (blue side).  Then it’s just a matter of answering the questions and following the prompts.  Like all our Tools, this Flowchart condenses a great deal of information and presents it in a straightforward, user-friendly manner.  Click here to download a copy of the new Flowchart for Tax-Exempt Use Property.

Plus, for more on this subject, check out our latest podcast episode – “Depreciation and the Non-Profit Tenant: What’s the Scoop?”  Click here to listen!

Have a question? Contact Bruce Johnson, Capstan Tax Strategies.

Value Of Cost Segregation Study: Multifamily Residential Property

Value Of Cost Segregation Study: Multifamily Residential Property

Renting is more popular than ever – the population of renters in U.S. cities has increased by over 30% since 2000. This has driven a commensurate increase in multifamily construction, and developers are striving to stand out from the pack. Current trends for attracting and retaining residents include time-savings services, flexible wellness zones, and pet-friendly amenities. These “extras” are attractive, but also add to a developer’s bottom line, and many seek out tax savings strategies to offset some of this initial investment.
Project MF is a 457,000SF rental community on the east coast. The facility consists of one four-story building, including 256 apartment units of various configurations. Of these, approximately half are standard apartment rentals, while the remaining units are fully furnished extended stay suites, available with month-to-month
leases. The developers of Project MF wanted to create a place tenants could live, work, exercise, and socialize, and were prepared to provide all the extras. With a depreciable basis exceeding $107M, the property includes a community lounge, conference rooms, café, fitness center, outdoor swimming pool, basement parking garage, and much more.

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Cost Segregation Is A Tax Planning Strategy

Cost Segregation Is A Tax Planning Strategy

What Is Cost Segregation?

Cost segregation is a tax planning strategy that can help real estate owners and tenants to accelerate depreciation deductions. Although standard depreciation occurs over a lengthy 39-year period, many assets within a structure–from plumbing and electrical fixtures to flooring–are not designed to last that long.

The ability to break out such assets for a five-year, seven-year, or 15-year recovery period helps accelerate depreciation, defer taxes, and improve cash flow.

Why Are Cost Segregation Studies Useful?

An engineering-driven cost segregation study can be useful at any point in the real estate cycle. Whether a property has been newly constructed, recently acquired, or undergone renovations or tenant improvements, a cost segregation study is likely to be a valuable depreciation tool. In certain cases, a look-back study can be appropriate.

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Energy-Efficient Tax Incentives Under Consolidated Appropriations Act 2021

Consolidated Appropriations Act 2021

Energy Study for EPAct 179D

A result of the Energy Policy Act of 2005, the 179D program incentivizes taxpayers to increase the energy efficiency of their new construction or renovation projects. The program focuses on three key areas of construction—interior lighting systems, building envelope, and HVAC – and is in effect for work completed after December 31, 2005.  The 179D program was made permanent by the Consolidated Appropriations Act of 2021.

The incentive is based on the analysis of the installed systems as compared to benchmarks designated in the ASHRAE standards. The goal is to achieve a minimum 50% energy savings versus these benchmarks.  For buildings placed-in-service between 1/1/2016-12/31/2020, the designated reference standard is the ASHRAE 90.1 2007 standard.  For buildings placed-in-service after 1/1/2021, the reference standard is the most recent ASHRAE standard published 2 years before the start of construction of said building.

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Handle With Care: What Is And What Is Not QIP

Handle With Care: What Is And What Is Not QIP

The CARES Act ushered in several changes that had a positive impact on real estate owners.  One provision that had a huge immediate impact was the retroactive correction of the recovery period for assets defined as Qualified Improvement Property (QIP) under the TCJA.  By defining the recovery period of these assets as 15-year straight line, they become eligible for the TCJA 100% bonus provision.  Many people heard this news and assumed that all post-TCJA interior improvements can be designated as QIP and therefore receive 100% bonus.  In other words, people think that if an interior space underwent a gut renovation on or after 1/1/2018, all associated spend can be designated as QIP.

We here at Capstan have heard this line of thinking quite a bit lately, and we caution our clients to step back and review the definition of TCJA-QIP before making any assumptions.  It cannot be assumed that all improvements made on after 1/1/2018 automatically qualify as TCJA-QIP.  There are several nuances that need to be considered.

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Cost Segregation: Maximize Your Real Estate Tax Savings Now

Cost Segregation: Maximize Your Real Estate Tax Savings Now

There’s so much to consider when embarking on a new construction project. One factor that should always be taken into account is the opportunity for tax savings. There are many favorable tax strategies that can boost a project’s bottom line, and often the key to employing them most successfully is simply good planning. Cost segregation is one of these powerful strategies, and it is primarily used to accelerate depreciation deductions, though it has myriad applications. The benefits of cost segregation on acquisitions, new construction and renovation projects result in significant tax deferrals and improved cash flow.

Cost segregation is an IRS-recognized tax benefit strategy in which
specific components of a building or improvement project are identified and reallocated into modified cost recovery system (MACRS) class lives for federal tax purposes. Treating the assets as personal property or land improvements allows depreciation of these assets to be accelerated. Personal property depreciates over 5 or 7-years and land improvements depreciate over 15-years. This is significantly quicker than conventional 39-year depreciation period.

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Consolidated Appropriations Act Of 2021 Brings Much-Needed Relief Along With Timely Extensions

Consolidated Appropriations Act Of 2021 Brings Much-Needed Relief Along With Timely Extensions

The Consolidated Appropriations Act of 2021 (the “CAA” or the “Act”) was signed into law on December 27, 2020.  At 5,593 pages, the Act is one of the largest in history, and can be viewed in full at here.  The CAA establishes funding for government operations throughout the fiscal year.  It also contains a number of personal and business tax provisions, and those most relevant to Capstan clients will be briefly reviewed here.

EPAct 179D Deduction

Congress crafts tax extension packages annually, and these packages generally extend incentives by a certain number of years.  In exciting news, the CAA permanently extended the EPAct 179D tax deduction.  It will be adjusted for inflation beginning in 2021.  This powerful incentive can help investors more confidently move forward, knowing that they can earn up to $1.80/SF in deductions.  As before, properties eligible for the 179D deduction may be either commercial property or residential rental property at least 4 stories high. New construction and renovation projects are both eligible for this tax strategy. Energy-efficient improvements made to the following building assets can contribute to this benefit:

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QIP Revisited: Five Years Of Qualified Improvement Property

QIP Revisited: Five Years Of Qualified Improvement Property

Qualified Improvement Property (QIP) was introduced to the federal tax code via the PATH Act of December 2015. Initially, QIP was conceived as a vehicle by which base building assets might become eligible for bonus depreciation when an existing building was improved.  In the last five years however, QIP has evolved into a core strategy for improvement work to commercial real estate.

As is the case with many tax strategies, QIP has a number of important details that must be kept in mind.  Let us start with the definition, as outlined under the PATH Act:

Any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed-in-service after the date the building was first placed-in-service by any taxpayer. Exclusions also exist for any work done to elevator, escalator equipment, enlargements of a building or work to structural members of a building.

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Cost Segregation And 1031 Exchanges – Better Together

Cost Segregation And 1031 Exchanges - Better Together

Commercial real estate owners, developers, and investors have many tools at their disposal with which to develop a strong tax strategy.  In addition to the stable of well-known strategies, the last few years have seen many expanded programs designed to incentivize real estate development. Two great examples are the 1031 exchange and accelerated depreciation, also known as cost segregation. Up until 2017, these two long-standing strategies have typically been mutually exclusive endeavors, as a byproduct of the 1031 process is a low step-up basis, which mitigates the effectiveness of cost segregation.   However, the Tax Cuts for Jobs Act (TCJA) changed aspects of both strategies in a way that facilitates their simultaneous use.

Under the TCJA, 1031 exchanges are required to exclude personal property from the exchange basis. This very exclusion may trigger a taxable event.

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Cost Segregation – Self Storage Very Popular Property Type

Bruce Johnson

Self-storage has been a very popular property type for cost segregation for many years. It ties closely to the boom in multifamily property development we have seen over the last decade or so. Most self-storage properties fall in the $1M-$5M basis range, but basis can stretch into the 10s of millions depending upon property size, location, and unique features.

There are certain features that make a self-storage facility a strong candidate for cost segregation.   For instance, does the subject property have climate-controlled lockers?  These specialty lockers are eligible for accelerated depreciation.  How are the interior walls between the lockers constructed?  If they are demountable and therefore movable, then there is a possibility that the walls themselves may be considered a personal property asset, and therefore be depreciated at a greater rate.

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