June 13, 2008
Dear Client,
Here is some background information regarding the potential tax savings opportunity that could result in a significant financial benefit to you. The Tax Court recently held, in Hospital Corp of America, for taxpayers, which will provide a significant tax planning opportunity to those investing in commercial real estate.
This case is a big win for taxpayers, and allows the owner of a purchased or constructed building to segregate the costs of the building into real property and personal property components. This is a critical distinction as the components of personal property are allowed an accelerated depreciable life of 5 or 7 years instead of the depreciable life of 39 years allowed for nonresidential real property.
The chart below illustrates the potential benefits of performing a cost segregation analysis on a building. By reclassifying $100,000 of project related costs from 39 year nonresidential real property to a shorter depreciable life, assuming a 35% federal income tax rate and a 7% return on investment, the following benefits could be realized.
|
|
5 Year Property |
7 Year Property |
15 Year Property |
|
Potential Depreciation Increase |
$ 18,600 |
$ 12,900 |
$ 3,600 |
|
Federal Income Tax Benefit |
$ 6,500 |
$ 4,500 |
$ 1,250 |
|
Investment return, if invested for 39 years |
$ 17,600 |
$16,100 |
$10,000 |
You may benefit from performing a cost segregation analysis on your building. In most cases, the amount of personal property reclassified to a shorter life averages from 10% to 30% of the total project cost. In completing your cost segregation, we will review project information to determine the capitalized cost basis for buildings, land improvements and personal property. These sources include the project cost information, project construction drawings, and various construction cost estimating techniques. A tour of your facility will be conducted to identify specific assets, which will qualify for accelerated federal income tax depreciation. We will only recommend a Cost Segregation Engagement if the professional fees are exceeded by preliminary estimates of tax benefits.
