November 15, 2021
Cost Segregation for Self-Storage and RV Parks
While commercial property owners and investors may have heard of cost segregation for commercial buildings, owners of self-storage and RV parks may think that there isn’t enough “building” in their properties to take advantage of cost segregation. The truth is there are substantial tax savings for investors in these properties!
What is Cost Segregation?
Cost Segregation is an IRS-approved method to properly depreciate commercial buildings according to their component’s asset lives rather than the “straight-line” approach that divides a building’s total value over 39 years. The word “properly” is in italics because the different components of a commercial building have different economic lives, and treating them as if they will ALL last 39 years is just not realistic.
The IRS does recognize this and allows building components to be divided up into different asset life categories: 5 year, 7 year, 15 year and 39 year. A cost segregation study identifies and assigns dollar values to the assets in each of these categories and then they can be depreciated accordingly. This specific economic life depreciation is referred to as “accelerated depreciation” to differentiate it from “straight-line” depreciation.
Properly identifying all components into their economic life categories is a tedious, detailed, job and should be left to firms that specialize in this type of analysis. This is not an activity that a traditional CPA has the time or resources to handle.
Here are some examples of assets in these categories:
5 and 7 year: carpet/flooring, specialty plumbing, computer cabling systems, cabinets/countertops, movable partitions, furniture, fixtures and equipment, CCTV security, controlled access gates, computerized locking or alarm systems, etc.
15 year: interior renovations, sheet rock, paint, lighting, paving, curbing, security fencing, access gates, lighting, retaining walls, storm drainage, and other utilities, etc.
15 year: utility tie-ins, gravel and asphalt driveways, site pads, signage, (RV Park specific) landscape, landscape irrigation, light poles and pathways.
100% Bonus Depreciation
While accelerated depreciation is great, 100% bonus depreciation is fantastic!! The Tax Cuts & Jobs Act of 2017 allows for building components with less than a 20 year asset life that are put in service after September 27, 2017 to be depreciated, at 100% of their value, in the tax year that a cost segregation study is performed!
For recently purchased or constructed properties (after Sept 27, 2017) 100% Bonus Depreciation is a game changer! Consider these self-storage examples:
While the building values are fairly comparable, the tax savings are dramatically greater for the location purchased in February 2019. The second example, purchased in June 2016, happened before the effective date for 100% Bonus Depreciation, so while it did realize the benefit of accelerated depreciation, it didn’t qualify for the benefit of 100% bonus depreciation.
100% Bonus Depreciation, as written in the current tax law, is scheduled to be phased out starting in 2023.
Even if you can’t use all of the tax savings benefit in a given tax year, you can roll the tax savings into a future year. Cost segregation is actually just a change in accounting method and DOES NOT require you to amend previous year’s tax returns!
You owe it to your bottom line to investigate whether you can benefit from cost segregation and accelerated depreciation!
This blog was generously written and provided by Tom Brodie a National Account Executive with CSSI – Cost Segregation Services Inc. If you have questions regarding your specific property, please do not hesitate to reach out to Tom at:
Mobile – 713-906-3710
Email – firstname.lastname@example.org
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