Bruce Johnson | TaxConnections

23 Aug 2022

The Tax-Exempt Tenant: How To Treat Depreciable Assets

It’s not your imagination – there are more and more non-profit tenants turning up in formerly retail spaces. At Capstan we are seeing many retail and office buildings bringing non-profit or government tenants into their properties. How does this impact the way depreciation rules are applied?

That’s a complicated question, and it’s a good thing that a picture – or a Capstan flowchart – is worth 1000 words. Before reading on, download your copy of our newest tool, the ADS Flowchart for Tax-Exempt Property.

Tax-Exempt property must be separated into two categories – there are rules in place for depreciating tax-exempt tangible property/land improvements and different rules in place for depreciating tax-exempt non-residential real estate. The Capstan flowchart is two-sided and color-coded, to clearly differentiate between tangible property and land improvements on the orange side, and non-residential real estate on the blue side.

Written by Bruce Johnson | Posted in Tax-Exempt Tenants

02 Aug 2022

45L Tax Credit: A Key Strategy To Consider Before 9.15

45L: A Key Strategy To Consider Before 9.15

It’s easy to underestimate the 45L Tax Credit. Over the years, the EPAct 179D Deduction has gotten a great deal of press, with 45L often presented as an afterthought, if at all. However, this oft overlooked incentive brings tremendous benefit, and is a key strategy to consider as you plan for 9/15.

The 45L credit is a federal tax credit that promotes the construction of energy efficient residential dwellings. The credit is available to builders, developers, and others who build homes for sale or lease. This one-time incentive can pack quite a punch, with each eligible dwelling unit able to claim $2,000 in tax credits. The credit can even be claimed retroactively for up to 3 years.

Single and multifamily homes up to 3 stories above grade are eligible for the 45L tax credit, including:

- Assisted living facilities
- Campus residential housing
- For-lease apartment buildings
- Condominiums
- Tract and custom single-family homes

Dwelling units within each property are assessed individually. It’s not an “all or nothing” proposition – some units may meet the criteria, and some may not. The entire property doesn’t need to qualify.

Dwelling units that meet the following criteria may claim the credit:

Written by Bruce Johnson | Posted in TaxConnections

28 Jul 2022

IRS Issues New Cost Segregation Audit Techniques Guidelines (ATG)

BRUCE JOHNSON - Cost Segregation IRS Audit Technique Guidelines

On 6/1/2022 the IRS updated its Cost Segregation Audit Techniques Guideline (ATG) for the first time since 2017. On Page 1 of the Introduction, the ATG states that it is “…not intended as an official IRS pronouncement. Accordingly, it may not be cited as authority.”  

 Nonetheless, the ATG is quite valuable as it takes readers into the mind of an IRS Examiner, spelling out exactly what he is looking for as he scrutinizes a report. The proactive and thoughtful reader can use this guidance to ensure best practices in his cost segregation studies. 

The 2022 update points out two new areas of focus. The importance of identifying land values is stressed, and an entire new chapter is added on the subject of electrical distribution systems. This seems to imply that future auditors will be taking a close look at these subjects. Director of Engineering Ziv Carmel notes, “Capstan engineers always seek to comply with IRS guidelines regarding electrical load distribution and analysis. We also make certain to confirm land values with the client.”

Written by Bruce Johnson | Posted in Cost Segregation IRS Audit Technique Guidelines

12 Jul 2022

Webinar Registration Wednesday, July 13th, 2022 (Free CPE) : Cost Segregation 201 On Commercial Real Estate Depreciation

Cost Seg 201: Current Commercial Real Estate Depreciation Strategies for 2021

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) corrected the recovery period of Qualified Improvement Property (QIP) to 15-year. This has tremendous implications and will play a large role in a modern comprehensive tax strategy. In this session we will examine the historical treatment of Qualified Property Categories and focus on the current status of QIP under the CARES Act. We will also explore other strategies that may be part of a comprehensive tax strategy and will discuss a strategic hierarchy for employing those strategies most successfully. Relevant Rev. Procs. and several real-life case studies will be reviewed.

Learning Objectives:
• Understand the history of Qualified Property Categories.
• Explain the implications of the CARES Act’s correction of QIP recovery period.
• Understand how to incorporate retroactive CARES Act changes into past returns.
• Understand the value of QIP as an indicator of Section 179-eligible property.
• Explain how strategies like Section 179 Expensing, Bonus Depreciation, the Tangible Property Regulations (TPRs) and Energy Incentives all contribute to a comprehensive tax strategy.
• Compare and contrast Bonus and Section 179.
• Use various tax strategies in a strategic manner to maximize savings.

Written by Bruce Johnson | Posted in Cost Segregation • Cost Segregation Studies

06 Jul 2022

A Change Is Coming: As Bonus Depreciation Prepares To Phase Down, Can Section 179 Expensing Step Up?

As they say, the only constant is change.

Many readers are aware that bonus depreciation rates are set to begin phasing down in 2023. Beginning 1/1/2023, bonus will shift from 100% to 80%, and the rate will continue to decline by 20% annually through 2026. In 2023, 80% of an asset’s cost may be written off using bonus. Section 179 expensing, however, will continue to permit the immediate expense of 100% of the asset cost, and we expect to see the popularity of this incentive grow in the next year. For the last several years both incentives were essentially equivalent, but with bonus rates soon to decline, Section 179 expensing may play a larger role in tax plans going forward.

Let’s review some major differences between these two incentives. First, bonus depreciation permits the deduction of a percentage of a cost while Section 179 permits the expensing up to a set dollar amount. (The 2022 Section 179 deduction limit is $1,080,000.)

Written by Bruce Johnson | Posted in Accelerated Depreciation • Section 179 Expensing Step Up

01 Jul 2022

Top 10 Things You Should Know About Cost Segregation

1. The concept is simple.

Any given property contains a multitude of different assets, and each of them can be expected to have a different useful life. For example, you can confidently expect marble flooring to last a lot longer than say, carpet tile. The IRS provides guidelines that indicate how long different assets might last, using a system called MACRS (Modified Asset Cost Recovery System.) The default MACRS class-life for an asset is 39 years. If no cost segregation study is performed, all assets will depreciate over 39 years for commercial property or 27.5 years for residential. Now that makes sense for marble flooring, but not for carpet tile. Why should carpet tile just sit on the books, being depreciated over 39 long years?

In a cost segregation study, engineers identify and quantify all building assets, and then assign each asset a cost. These costs are then segregated into different categories according to their asset class lives. Base building or “shell” assets remain 39-year assets, but many items can be moved into shorter-lived class lives:

Written by Bruce Johnson | Posted in Cost Segregation

13 Oct 2021

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.

Written by Bruce Johnson | Posted in Property Depreciation • Real Estate

05 Oct 2021

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.

Written by Bruce Johnson | Posted in Cost Segregation Studies • Multifamily Residential Property

28 Sep 2021

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.

Written by Bruce Johnson | Posted in Cost Segregation Studies • Tax Planning Strategies

08 Sep 2021

Energy-Efficient Tax Incentives Under 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.

Written by Bruce Johnson | Posted in Consolidated Appropriations Act

26 Aug 2021

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.

Written by Bruce Johnson | Posted in Qualified Improvement Property (QIP)

19 Aug 2021

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.

Written by Bruce Johnson | Posted in Cost Segregation • Real Estate • TaxConnections