Tax Incentives to Make Commercial Real Estate More Affordable

Unless you are an accountant, or an existing building owner, you may not have heard of the term Cost Segregation. It is, however, one of the most important concepts for a prospective building owner to understand and put to work.

Cost segregation is a tax depreciation strategy that divides the building cost into various components. Some of these components can be depreciated over a period of as low as five years instead of the 39 years required to be used for buildings. Without tax segregation, a building owner would be paying more in taxes than necessary because the entire building is depreciated over 39 years.

The present value of the tax savings to the building owners can be substantial. By accel­erating tax deductions into earlier years, there is more value since the building owner has the use of the money from the tax savings years earlier than they would otherwise.

Consider this recent real world example. The building (net of land value because land cannot be depreciated) has a value of $1,098,310. Without cost segregation, the depreciation expense would be that amount divided by 39 years or $28,162 per year. At the 28% tax brack­et, that expense would save the client $7,885.

With cost segregation the buildings component parts are broken out into separate depreciable lives. Site improvements are depreciated over just 15 years, carpet over 5 years, signage over 7 years, just to name a few. Together, the cost segregation expanded the tax expense to $47,736, which meant a tax saving of $13,366, or $5,481 more than without the cost segregation.

Whether you are planning to purchase a building or already own one, make certain that you talk with your accountant about the incredible tax benefits of cost segregation.

Statistics compiled by Coldwell Banker Evergreen Olympic Realty, Inc. from the NWMLS database. Statistics not compiled or published by NWMLS.