Increased cashflow for real estate owners.

• Author: Heard, Marianne

In the last two years, several tax changes have provided real property owners with a great opportunity to use their assets to provide additional cashflow and increased internal rates of return (IRRs); however, 2004 is the last year to take full advantage of some of these savings.

Background

Over the past five years, knowledgeable tax professionals have been fine-tuning cost-segregation studies to save significant tax dollars for clients that own or lease real estate. Using a properly constructed and documented study, assets previously classified as 27.5- or 39-year property may be appropriately reclassified as five-, seven- or 15-year property. Accelerating depreciation produces tax savings and significantly enhances cashflow.

For example, items ranging from removable carpeting and strippable vinyl wall coverings, to soft costs (e.g., architects' fees and construction general conditions), to electrical, plumbing and mechanical work associated with personal property, are typically included in the 27.5- or 39-year pool. Using the engineering and invoice approach, a capital cost-segregation study can provide the documentation needed to segregate these costs according to their shorter useful lives, which increases the depreciation deduction's net present value, as well as cashflow resulting from tax savings in the asset's initial year.

Using Bonus Depreciation

By combining the 30% bonus depreciation enacted by the Job Creation and Worker Assistance Act of 2002 (increased to 50% by the Jobs and Growth Tax Relief Reconciliation Act of 2003) with a cost-segregation study, "qualified" new property eligible for 50% bonus depreciation with a modified accelerated cost recovery system (MACRS) five-year life, using a half-year convention, could qualify for as much as 60% of cost being depreciated in the first year. Obviously, the more personal property identified, the greater the tax savings. Recent cost-segregation studies have resulted in an average 3.27% increase to the IRR.

Sec. 168(k)(2)(A) defines "qualified property" as MACRS property with a class life of less than 20 years, water utility property, computer software that is not a Sec. 197 intangible and qualified leasehold improvement property. This is exactly the type of property identified...