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Best B
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Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Release Powerful, Underutilized Tax-Saving Strategies for Commercial and Investment Real properties
Understanding The Latest IRS UpdatesRelative to Cost Segregation Studies
This document and/or electronic file contains information that (a) is or may be LEGALLY PRIVILEGED, CONFIDENTIAL, PROPRIETARY IN NATURE, OR OTHERWISE PROTECTED BY LAW FROM DISCLOSURE, and (b) is intended only for the use of Best Bottom Lines, LLC. You must have written authorization from Best Bottom Lines, LLC to use, copy or distribute any part of this document as it’s strictly prohibited.
Best B
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Best B
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Best B
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Goal of Cost Segregation Studies
Goal = to identify all construction-related costs that can be depreciated over 5, 7 and 15 years and reclassified from 39, 31.5 and 27.5 yearsTraditional depreciation for Real Property is 39 years for commercial property and 27.5 years for residential rental propertyPersonal property is depreciated much quicker and can be depreciated over 5, 7, 10, and 15 yearsReducing tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow
Would you Rather Get Your Money Back Today or in 39 Years?Would you Rather Get Your Money Back Today or in 39 Years?
“You must pay taxes. But stop leaving a tip.”
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Best B
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Best B
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Major Benefits to The Property Owners?
Generates Cash Flow and Minimizes TaxesLook back study for catch-up of depreciation could generate refundFree up money for investments which allows for compounded growthBenefit to clients includes ability to expense versus capitalization of real property when conducting demolition or when remodeling is involved.Reduces real estate property taxesIncrease Cash Flow for Maximum Bank FinancingSection 179 BenefitsReduced Insurance premiums
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Best B
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Best B
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So What Is The Big Deal?
The depreciation for a property with a Cost Segregation Study allows for significant increase in deductions within the first five years.
For every $100,000 of cost shifting from 39-year property to 5-year property, the net present value of the tax benefit is approximately $16,000*
For $100,000 of cost shifted from 39-year property to 15-year property, the net present value of the tax benefit is approximately$10,600*
* Benefits assume a tax rate of 35% and a 5% return on investment
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Best B
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Best B
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Timing Illustration
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Best B
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Best B
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CSS Brief History
CS has been around since the 1960’s – it was called Component DepreciationThere have been over 200 court cases and IRS rulings supporting the benefits of CSInitial cases were related to Investment Tax Credit (ITC) and whether items related to a structure could qualify for a credit.Congress enacted ACRS 1981 with new shorter lives
40 year life reduced to 15, 18 & 19 yearsSimultaneously disallowed component depreciation
MACRS enacted in 1986 reiterated disallowance of component depreciation
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Best B
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Best B
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Hospital Corporation of AmericaLandmark Decision - 109 TC 21(1997)
Court reinstated and expanded a form of component depreciation Certain costs related to specific ordinary use equipment (building support systems that would otherwise be viewed as structural) qualify to be depreciated over life of underlying asset.IRS acquiesced to Tax Court Ruling - 1999
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Best B
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Best B
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CSS Brief History
In 1999, the IRS released Legal Memorandum 19921045 in which the IRS agreed not to contest the (HCA) reclassification of building costs into different asset categories that result in shorter depreciation lives
– This legal memorandum directs agents to verify that an engineering or architectural study has been done to identify portions of the building's system not related to the operation and maintenance of the building
– Without these detailed studies, IRS agents are advised NOT to accept the reclassifications
– is a “facts and circumstances” assessment– Use of Cost Segregation Study (CSS) must be specifically applied by the
taxpayer– Allocations based on “logical and objective” measures– Not based on non-contemporaneous data, or assumptions without
supporting records– CSS must be “closely scrutinized” by the field
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Best B
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Best B
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IRS - Audit Technique Guide
Issued in April 2004Developed to assist Field Examiners“WHY” are cost segregation studies performed?“HOW” are they prepared?“WHAT” to review and look for?
IRS Cost Segregation Audit Techniques Guide –Assist Field Examiners
– “Why” are CSS performed?– “How” they are prepared?– “What” to review and look for?
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Best B
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Best B
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What is being said about Cost Segregation?
“It is not unusual for engineering consultants to classify 20 to 40 percent of construction as personal property”Audit Technique Guide
“Investors find a friend in the IRS”
“Cost Segregation Studies fast growing tax strategy”
“Property Owners Profit from Change in Tax Law”
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Best B
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Best B
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Qualifying Property
Any building placed in service since January 1st, 1987Existing buildings undergoing renovation, remodeling, restoration, or expansionMajor leasehold improvements to any building made after January 1st, 1987Inheritance of commercial and investment real propertiesPreconstruction planning to recommend possible modification to the building designs to increase shorter-life asset classification
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Best B
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Best B
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Cost Segregation for an Existing Building“Catch Up” – Look Back
If a cost segregation study is conducted on an existing building,
– The unclaimed depreciation on personal property components that were previously classified as real property can be deducted as a Code Sec. 481 (a) adjustment in the year of change
– The automatic change of accounting rules of Rev. Proc. 2002-9, apply
If a cost segregation study is performed on a building that was placed in service in a tax year that ended before December 30, 2003,
– The IRS will allow a tax payer to file amended returns to claim the benefits
– Interest is payable by the IRS on the refund
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Best B
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Best B
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Cost Segregation Studies IncludesNew and Previously Acquired Properties
The optimal time to perform a study is the year the property is placed in serviceCurrent IRS procedures allow a taxpayer to recover any missed depreciation on properties placed in service as far back as 1987 without having to amend prior years tax returnsCost Segregation is not limited to new construction. In fact, most studies are performed on acquired properties where land and building is purchased for one negotiated price in a previous year
OR
MACRS - GDS
39 - Year Property
27.5 – Year Property
15 - Year Property
7 - Year Property
5 - Year Property
3 – Year Property
NEW CONSTRUCTIONIndirect Costs
+General Contractor
Costs+
Direct Costs outsideGeneral Contract
ACQUIRED PROPERTY
Purchase Price
Land Cost
Building and SiteImplementation Cost
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Best B
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Best B
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Benefit of Cost Segregation – Cash Flow –Would You Take the Cash Savings Today?
CSS Illustration No. 1CSS Illustration No. 1
A taxpayer purchases (or constructs) a strip mall for $4 million (land excluded)Without a Cost Segregation Study, the taxpayer would have depreciated $4,000,000 as a 39-year asset over 40 years (straight-line, HY convention)
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Best B
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Best B
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Benefit of Cost Segregation – Cash Flow –Would You Take the Cash Savings Today?
By segregating assets and applying proper class lives, significant portion of the building can be depreciated fasterTypically, about 35% of total cost can be reclassified from realproperty to personal property for this type of building
CSS Illustration No. 1- (continued)CSS Illustration No. 1- (continued)Asset Original Original Allocation Allocation
Class Asset Life Allocation Allocation After CSS After CSS
Personal Property 5 yr. 200% db -$ 0.0% 1,000,000$ 25.0%
Personal Property 7 yr. 200% db -$ 0.0% -$ 0.0%
Land Improvements 15 yr. 150% db -$ 0.0% 400,000$ 10.0%
Real Property in yrs. 39 4,000,000$ 100.0% 2,600,000$ 65.0%
4,000,000$ 100.0% 4,000,000$ 100.0%
4,000,000$ 100.0% 4,000,000$ 100.0%Total Cost
Real & Personal Property
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Best B
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Best B
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Benefit of Cost Segregation – Cash Flow –Would You Take the Cash Savings Today?
Cash savings of $320,282 can be achieved over the fist 5 years w/ CSSAlthough cash savings / tax savings over the tax life of the building does not exist, net present value of the earlier tax savings or deferred taxes due to accelerated depreciation results in net present value of $200,000!
CS
S Illustration C
ontinuedC
SS
Illustration Continued
Asset Year Year
Depreciation Expense
Without CSS
Depreciation Expense With
CSSChange in
Depreciation
Tax Savings from Change in
Depreciation (35% Tax Rate)
NPV of Deferred
Taxes (5% Disc. Rate)
CumulativeNPV
1 2006 98,291$ 283,889$ 185,598$ 64,959$ 64,959$ 64,959$ 2 2007 102,564$ 424,667$ 322,103$ 112,736$ 107,368$ 172,327$ 3 2008 102,564$ 292,867$ 190,303$ 66,606$ 60,414$ 232,740$ 4 2009 102,564$ 212,647$ 110,083$ 38,529$ 33,283$ 266,023$ 5 2010 102,564$ 209,569$ 107,005$ 37,452$ 30,812$ 296,835$
5-year Total 2010 508,547$ 1,423,638$ 915,091$ 320,282$ 296,835$
6 2011 102,564$ 149,198$ 46,634$ 16,322$ 12,789$ 309,623$ 7 2012 102,564$ 90,286$ (12,278)$ (4,297)$ (3,207)$ 306,417$ 8 2013 102,564$ 90,286$ (12,278)$ (4,297)$ (3,054)$ 303,363$ 9 2014 102,564$ 90,286$ (12,278)$ (4,297)$ (2,909)$ 300,454$
10 2015 102,564$ 90,286$ (12,278)$ (4,297)$ (2,770)$ 297,684$ 10-year Total 2015 1,021,368$ 1,933,981$ 912,614$ 319,415$ 297,684$
40 2045 4,274$ 2,778$ (1,496)$ (524)$ (78)$ 200,039$ Over 40 Years 4,000,000$ 4,000,000$ -$ -$ 200,039$
Cost Segregation Estimate Benefit Calculation
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Best B
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Best B
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Again, What is the Big Deal?
The depreciation for a property with a Cost Segregation Study allows for significant increase in deductions within the first five years.
For every $100,000 of cost shifting from 39-year property to 5-year property, the net present value of the tax benefit is approximately $16,000* (NPV = $16.00 per $100 invested)
For $100,000 of cost shifted from 39-year property to 15-year property, the net present value of the tax benefit is approximately$10,600* (NPV = $10.60 per $100 invested) * Benefits assume a tax rate of 35% and a 5% return on investment
FASTER CASH FLOW!
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Best B
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Best B
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First element of a quality Cost Segregation Study according to the IRS Audit Techniques Guide is:Provider who marries the science of engineering with the principles of tax and accounting to arrive at financial solutions that results in increased cash flow, minimized tax payments and increased ROI. A firm that meticulously follow the IRS guidelines and go beyond the standards and basic requirements outlined by the IRS “Prepared by an individual with expertise and experience.”
Select CPAs and engineers familiar with engineering, construction, architectural and estimating processes and techniques are essential for a quality CSS process.Select CPAs and engineers with appropriate tax background and knowledge of over 200 court cases, many revenue ruling and revenue procedures dealing with cost segregation area are essential for a quality CSS.
Additional Considerations
I think Audit should be first
I would also add preconstructionMust understand abandonment issuesKnowledgeable on issues involved with §1031 & §1033 exchanges and how they interact with Cost SegregationMust have expertise in Form 3115 Change in Accounting Method filing proceduresUnderstanding how Cost Segregation can affect estate taxes, passive loss situations, IRS §179 deductions, Net Operating Loss situations, §168(k), partnership §754 step-up elections and other tax situationsExperience in lease review and identification of“qualified leasehold property”Does the CSS include time for audit support
Why are the CPA and Engineer Important in the CSS Process?
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Best B
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Best B
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Tax Planning & Other Benefits
Demolition Loss –expense vs capitalizeEstate Planning Strategies1031 Exchange StrategiesReal Estate ProfessionalPassive Taxpayer & Multiple Entities
• Insurance Premiums
• Recapture
• Closing Costs (doc stamps)
• Property Tax Benefits (RE vs. Tangible PP)
• Preconstruction recommendations
• Lessor
• Lessee
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Best B
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Best B
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1031 Exchanges Planning With CSS
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Best B
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Best B
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Why do I need an Engineering Expertise for a CSS?
Cost segregation study (CSS) is an IRS-sanction technique allowing businesses to accelerate depreciation on their facilitiesAlthough the IRS does not prescribe one specific methodology, the IRS’ Cost Segregation Audit Technique Guide does not enumerate several and elevates the Detailed Engineering Approach From Actual Cost Records as “the most methodical and accurate approach”
– This approach consists of carefully examining all contemporaneous construction and accounting records
– Estimates or “take-offs” are used to supplement the actual cost detail when the existing detail is not sufficient for the purposes of the study
– A professional firm comprised of accountants, engineers, and architects with prior cost segregation experience, is required to perform this kind of cost segregation study
Methodology without the engineering expertise will not withstand IRS scrutiny in accordance with the IRS Audit Technique GuidelinesWithout the contractor/engineering expertise coupled with the tax law guidance, there will likely be valuable tax benefits left on the tableDetermining 1245 property value on existingproperties must be properly documented andappraised and indicated according to the IRSAudit Technique Guidelines
3 Words: Mechanical, Electrical, Plumbing3 Words: Mechanical, Electrical, Plumbing
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Best B
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Best B
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Detailed Engineering Approach
Identify the specific project/assets that will be analyzedObtain a complete listing of all project costs and substantiate the total project costsInspect the facility to determine the nature of the project and its intended usePhotograph specific property items for reference.Review “as-built” prints, specifications, contracts, bid documents, contractor invoices and other construction documentation. Identify and assign specific project items to property classesPrepare quantitative take-offs for all materials and payment records to compute actual unit costs
Audit Technique Guide
“It is the most methodicaland accurate approach.”
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Best B
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Best B
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Qualifying Property
Airports
Apartment buildings
Assisted Living Facilities
Automobile dealerships
Automotive service centers
Banks
Casinos
Cinemas
Day care centers
Department stores
Distribution centers
Fitness centers
Funeral homes
Gas stationsGolf resortsGrocery stores HospitalsHotels
Industrial facilities
Laboratories
Manufacturing facilities
Marinas
Medical facilities
Mixed-use facilities
Nursing homes
Office buildings
Research facilitiesRetail centersResortsRestaurants
Service stations
Shopping centers
Sports facilities
Storage facilities
Warehouses
Property TypesProperty Types
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Best B
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Best B
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Which Properties Benefit Most?
18%
18%
18%
19%
21%
23%
24%
24%
25%
25%
25%
26%
27%
27%
27%
29%
31%
31%
32%
33%
33%
34%
34%
38%
0% 20% 40% 60% 80% 100%
M anufacturing & Processing
Airport Hangers
Distribution Centers
Industrial
Shopping Centers
Auto Service Centers
M arinas
Post Office
Office Buildings
Department Stores
Fitness Centers
Auto Dealerships
Day Care Centers
Hospitals
Warehouses
M edical/Surgical
Banks
Laboratory/Research
Nursing Homes/Assisted Living
Hotels
Leasehold Improvements
Residential Rentals
Restaurants
Resorts
Personal PropertyReal Property
Property Type Percentage Reallocated
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Best B
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Best B
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Cost Segregation Recent Results
Project: Hotel
Cost: $7,123,456
5 Year Tax Savings: $812,145
Project: High-End Office Building
Cost: $5,234,125
5 Year Tax Savings: $625,678
Project: Apartment Complex – 12 Complexes
Cost: $18,100,000
5 Year Tax Savings: $1,585,222
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Best B
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Best B
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Look Back ExampleC
SS
Look back Exam
pleC
SS
Look back Exam
ple
• A taxpayer purchased (or constructed) a strip mall for $4 million (land excluded) in 2000
• Without a Cost Segregation Study, the taxpayer has been depreciating $4,000,000 as a 39-year asset over 40 years (straight-line, HY convention)
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Best B
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Look Back Example – continued
• What could you do with the new found money of $336,604 that was trapped in the walls of your investment?
Make additional investment
Reduce mortgage debt
Address maintenance items
CS
S Look B
ack Exam
ple (continued)
CS
S Look B
ack Exam
ple (continued)
Asset Year Year
Depreciation Expense
Without CSS
Depreciation Expense With
CSSChange in
DepreciationOverpaid Taxes (35% Tax Rate)
1 2000 98,291$ 283,889$ 185,598$ 64,959$ 2 2001 102,564$ 424,667$ 322,103$ 112,736$ 3 2002 102,564$ 292,867$ 190,303$ 66,606$ 4 2003 102,564$ 212,647$ 110,083$ 38,529$ 5 2004 102,564$ 209,569$ 107,005$ 37,452$ 6 2005 102,564$ 149,198$ 46,634$ 16,322$
6-year Total 611,111$ 1,572,836$ 961,725$ 336,604$
Cost Segregation Estimate Benefit Calculation
IRS Owes The Property Owner $336,604! IRS Owes The Property Owner $336,604!
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Best B
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Best B
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Examples of Pre-Construction Benefits
Pre-Construction Planning: In the design phase, CORE can help make the building more tax efficient by identifying business components from the structural componentsExample: Law Firm uses hinges for $1MM decorative lobby shelving versus attaching shelving with a permanent adhesive
– Total property is able to be moved from 39-year depreciation to 5-year depreciation for a tremendous savings
Example: Hospital installs $1.8MM floating floor system versus permanent attached flooring
– Structurally as sound, cash savings from more attractive depreciation schedule substantial
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Best B
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Best B
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Insurance Savings Alone May Pay forCost Segregation Study
There are a number of benefits to your insurance program after completing a Cost Segregation study:
– Lower premiums. By providing the insurance underwriter with a Cost Segregation study, they can better understand your risk, their company’s exposure and accurately rate your insurance
There is no more guess work on the underwriters behalf and that guess work usually works in their favor in the way of higher premiums to you
– In the wake of the recent natural disasters affecting the insurance market, most insurance policies are changing from blanket policies to stated value
Each location will carry a stated value on the policy and in theevent of a claim that is the maximum you can collectA Cost Segregation study will provide you with the piece of mindthat you are insured to full valueCost segregation studies allow property owners to accurately insure their business property, leading to a more cost effectiveuse of your insurance dollar
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Best B
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Additional Benefits from CSS Demolition/Rehabilitation
Ability to identify components of a building prior to demolition and/or rehabilitation which can be reclassified as personal property versus real propertyAllows the owner to write off these items versus capitalizing the assets which generate a substantial tax savingsFor example, if a property owner has a $5-million property that they are going to demolish:
– The total cost would typically get applied to the land with the property owner having no ability to depreciate or recoup the $5-million investment
– A cost segregation study, prior to the demolition, identifies $1,500,000 of personal property
– The property owner will now be able to write off the $1,500,000 as abandoned personal property
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Best B
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Real Estate Investment Trusts (REITs) Benefit
Increase non-cash expense to reduce income and thus minimize dividend distribution, allowing increased cash flow for additional acquisitionsREIT dividends have 3 components:
– Ordinary Dividends– Long-Term Capital Gains Dividends– Return of Capital Dividends
Due to the favorable tax treatment of Return of Capital Dividends (taxed at the long-term capital gains rate of 15% or 25% and tax payment is deferred until the sale of the share), investors typically prefer dividends with the greatest percentage of Return of CapitalCost Segregation increases the Return of Capital component; thereby, increasing the Taxable Equivalent YieldDIVIDEND GROWTH IS INCREASED
– A significant source of dividend growth is acquisitionsREIT must pay out a minimum of 90% of taxable income as dividends, and many REITs pay out over 100% of taxable income.
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Best B
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Best B
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Cost Segregation Asset Class Lives for Restaurants
The crux of cost segregation is determining whether an asset is I.R.C.– §1245 property (shorter cost recovery period property, 5 or 7 years) –
e.g., depreciable personal property, such as equipment – or – §1250 property (longer cost recovery period property, 39, 31.5 or 15
years) – e.g., buildings and building components, which generally are not §1245 property
The Director for the Retailers, Food, Pharmaceuticals and Healthcare Industry chartered a working group to address the most efficient way to approach cost segregation issues specific to the restaurant industry
– The group produced a special section related to the required cost segregation study for such purposes
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Best B
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Cost Segregation and 1031 Exchanges- Best of Both Worlds -
Most valuable tax deferral strategies for real estate are:– Cost Segregation (Accelerated depreciation of real estate)– 1031 Exchanges (Deferral on the disposition of appreciated property)
How To Best Utilize Both Strategies– Real Estate Investors and their advisors must understand issues in
utilizing both strategiesReal vs. Personal Property
– Real and personal property under section 1031 is determined by state law
– In contrast, the definition of real and personal property for cost segregation studies is determined under federal law
– Property such as wall coverings, carpeting, special purpose wiring or other installations affixed to the building can be considered real property under state law and like kind for section 1031 purposes, but be considered personal property in cost segregation studies
– Real estate owners can benefit from both the gain deferral undersection 1031 for real estate exchanges and the enhanced cost recovery deductions of cost segregation study
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Best B
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Best B
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IRS Determination/Tests -Structure or Personal?
Permanency test - Sec. 1.48-1 (c)Is the property capable of being moved?Has it been moved?Is the property designed or constructed to remain permanently in place?Are there circumstances which tend to show the expected or intended length of affixation - i.e. may or will be moved?How substantial of a job is removal of the property & how time consuming?Is it readily movable?How much damage will the property sustain upon removal?What is the manner of affixation of the property to the land?
Factors that now govern whether property is permanent or can be reclassifiedin accordance with IRS Audit Technique Guidelines:
Factors that now govern whether property is permanent or can be reclassifiedin accordance with IRS Audit Technique Guidelines:
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Best B
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IRS Determination/Tests -Structure or Personal?
The appearance test:– Whether the structure looks like a building– Generally only requires that the structure enclose
a space within its walls and usually be covered by a roof
The second part of the test requires that the building function as a building:
– The courts primarily focused on whether the structure provides working space for employees that is more the merely incidental to the primary function of the structure
– Both the quantity and qualify of human activity inside the structure may be considered in this regard
Appearance and Function TestAppearance and Function Test
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Best B
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Best B
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Items To Be Reclassified in a Cost Segregation Study
Site Improvements (landscaping/parking)Light FixturesBranch wiringSpecial PlumbingFlooringMillworkMillwork Window CoveringsPartition WallsCabinetryFurnishingsShelvingWall Coverings
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Best B
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Qualified Property
Property to include:
– Accordion-style room dividers
– Decorative lattice millwork used to separate areas
These items are not permanent structures therefore do not affect the operation nor maintenance of the building1245 property
PartitionsPartitions
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Best B
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UNIQUE ASSETS TO IDENTIFY
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Qualified Property
Property to include:– Main panels – Motor control centers– Transformers – Main distribution panel switchgear– Related wiring and conduit
The courts conclude that the portion of the cost of the primary and secondary electrical distribution systems which is equal to the percentage of the electrical load carried to those systems allocable to the property equipment, as stipulated constitutes the 1245 qualification class property and is depreciable over an accelerated life
Primary and Secondary Electrical Distribution SystemsPrimary and Secondary Electrical Distribution Systems
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Best B
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Best B
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Qualified Property
Property to include:– Controls– Battery packs – Battery chargers for emergency power
equipment– Illuminated emergency and entrance signs– Medical gas control and alarm equipment– Kitchen equipment – Wired clock systems
Normally 100% of the load carried relates to this type of equipment, therefore the balance of the electrical is normally allocated to the building
Branch Electrical Wiring and Connections, and Special ElectricalEquipment
Branch Electrical Wiring and Connections, and Special ElectricalEquipment
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Best B
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Best B
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Qualified Property
Systems supported:Call systems
– Intercommunication systems
– Dictation systems – Music systems– Paging systems
Electrical Wiring Relating to Internal CommunicationsElectrical Wiring Relating to Internal Communications• Property to include:
Conduit
Wiring
Electrical connections
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Best B
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Best B
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Qualified Property
Property to include:Branch electrical wiringConduit, floor boxes Junction boxesOutlet receptaclesAll other equipment in connection with its operation
Wiring and Related Property Items Relating to Television EquipmentWiring and Related Property Items Relating to Television Equipment
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Best B
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Qualified Property
Property to include:Items relating to operation of grease trap systemsTrench drainsGrease waste pipingWaste excavationWaste fillTrap itselfAll connections (hose and reel connections) Water piping used for operation of kitchen equipment
Kitchen PlumbingKitchen Plumbing
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Best B
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Qualified Property
Property to include:– Air intake fans & related
duct work– Dishwasher condensate
return unitsThese items ventilate air, remove humidity and steam, replace air expelledTest:
– Do the items relate to the buildings operation or maintenance?
– NO! Therefore are considered Section 1245 property
Kitchen Hoods and Exhaust SystemsKitchen Hoods and Exhaust Systems
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Best B
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Best B
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Sample Report –Engineering Calculations Per IRS Guidelines
Total S.F. Unit CostUnit of
Measure Qty SubtotalFunctional
OBS. Total Unit
CostLocation
Factor Unit Cost Adj. Totals Reference NumbersSales Floor 880Special FinishesVinyl Baseboard-4" high, .080" thick 1.78$ l.f. 108 192.24 100.00% 192.24 100% 192.24 09-651-200-1150Carpet-42 oz. Nylon 43.00$ s.y. 98 4,214.00 100.00% 4,214.00 100% 4,214.00 09-673-800-1100Total-Special Finishes 4,406.24
Finishes1/2" gypsum wallboard- taped & finished 0.65$ s.f. 972 631.80 100.00% 631.80 100% 631.80 09-250-700-0150Paint 0.73$ s.f. 972 709.56 100.00% 709.56 100% 709.56 09-910-920-1240Total-Finishes 1,341.36
Furnishings - Window coverings-Vertical 3" PVC 9.55$ s.f. 180 1,719.00 100.00% 1,719.00 100% 1,719.00 12-483-100-1500Total-Furnishings 1,719.00
7,466.60
Total S.F. Unit CostUnit of
Measure Qty SubtotalFunctional
OBS. Total Unit
CostLocation
Factor Unit Cost Adj. Totals Reference NumbersOffice #1 195Special Doors & WindowsInterior Window Glass-3/8" thick, tinted 6.90$ s.f. 36 248.40 100.00% 248.40 100% 248.40 08-810-850-0600Total-Special Doors & Windows 248.40
Doors & WindowsHollow core door-3' W x 6'-8" H 102.00$ ea. 1 102.00 100.00% 102.00 100% 102.00 08-210-900-2380Door trim-pine, 4-9/16" deep 8.35$ l.f. 15 125.25 100.00% 125.25 100% 125.25 08-210-960-3020Total-Doors & Windows 227.25
Special FinishesVinyl Baseboard-4" high, .080" thick 1.78$ l.f. 53 94.34 100.00% 94.34 100% 94.34 09-651-200-1150Carpet-42 oz. Nylon 43.00$ s.y. 22 946.00 100.00% 946.00 100% 946.00 09-673-800-1100Carpet Padding-sponge, rubber 6.05$ s.y. 22 133.10 100.00% 133.10 100% 133.10 09-673-600-9000Total-Special Finishes 1,173.44
Finishes 0.00%1/2" gypsum wallboard- taped & finished 0.65$ s.f. 488 317.20 100.00% 317.20 100% 317.20 09-250-700-0150Paint 0.73$ s.f. 488 356.24 100.00% 356.24 100% 356.24 09-910-920-1240Total-Finishes 673.44
2,322.53
Office
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Sample Report –Depreciation AnalysisPer IRS Guidelines
Total Construction 1,300,000.00$ Pert Client Records Dec-04 1,300,000.00$ Land Value 450,000.00$ Depreciable Basis 850,000.00$
Total Depreciable Basis 850,000.00$
Market Value Factor 111.04%
Total Building Cost Total Project Cost BasisBuilding Construction Class Market Value Factor Totals 39 yr. acc 15 yr. acc 7 yrs. acc.2100 Sitework-Improvements 104,090.94$ 15 111.04% 115,581.51 - 115,581.51 - 3000 Concrete 33,690.60$ 39 111.04% 37,409.69 37,409.69 - - 3100 Special Concrete 6,528.00$ 7 111.04% 7,248.62 - - 7,248.62 4000 Masonry 53,650.00$ 39 111.04% 59,572.41 59,572.41 - - 5000 Metals 5,076.00$ 39 111.04% 5,636.34 5,636.34 - - 6100 Special Woods & Plastics 12,302.82$ 5 111.04% 13,660.92 - - - 7000 Thermal & Moisture Protection 27,664.00$ 39 111.04% 30,717.82 30,717.82 - - 8000 Doors & Windows 89,015.50$ 39 111.04% 98,841.89 98,841.89 - - 8100 Special Doors & Windows 2,278.80$ 5 111.04% 2,530.36 - - - 9000 Finishes 91,175.06$ 39 111.04% 101,239.85 101,239.85 - - 9100 Special Finishes 49,360.91$ 5 111.04% 54,809.85 - - - 12000 Furnishings 13,814.40$ 5 111.04% 15,339.37 - - - 15000 Mechanical 141,440.60$ 39 111.04% 157,054.18 157,054.18 - - 15100 Special Mechanical 45,515.40$ 5 111.04% 50,539.83 - - - 16000 Electrical 24,883.60$ 39 111.04% 27,630.49 27,630.49 - - 16100 Special Electrical 65,010.40$ 5 111.04% 72,186.88 - - -
Sub-Total 765,497.03$ 850,000.00 518,102.67 115,581.51 7,248.62 Total 765,497.03$ 850,000.00 518,102.67 115,581.51 7,248.62
Cost Segregation Analysis - Depreciation Reconciliation
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Best B
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Sample Report – Depreciation SchedulePer IRS Guidelines
Depreciation Analysis
YR 1 2
Report Total Accum. Dep. 2004 2005
Method of Depreciation Depreciation Expense: 12/21/2004 Placed In Service
39 Year Commercial Property 12/21/2004 $850,000.00 $850,000.00 909.50$ 21,794.00$ Total Depreciation 909.50$ 21,794.00$
DEPRECIATION DATA
12/21/2004Total Construction 1,300,000.00$
Land Value 450,000.00$ Depreciable Basis 850,000.00$
1 2
Report sub-totals 2004 2005
Method/Convention of Deprec Depreciation Expense: 12/21/2004 Placed In ServiceStraight Line-Mid Month 12/21/2004 518,103$ 518,103$ 554.37$ 13,284.15$
Sub-Total 39 Year Real Property 518,103$ 518,103$ 554$ 13,284$
150% MM 4th Qtr 15 year Land Improvments 12/21/2004 115,582$ 115,582$ 1,445$ 11,419$ Sub-Total 15 Year Real Property 115,582$ 115,582$ 1,445$ 11,419$
200% - MM 4th Qtr 7 Year MACRS Property Sec. 1245 12/21/2004 7,249$ 7,249$ 259$ 1,997$ Sub-Total 7 Year Personal Property 7,249$ 7,249$ 259$ 1,997$
200% - MM 4th Qtr 5 Year MACRS Property Sec. 1245 12/21/2004 209,067$ 209,067$ 10,453$ 79,446$ Sub-Total 5 Year Personal Property 209,067$ 209,067$ 10,453$ 79,446$
Total Depreciation Per Cost Segregation Analysis 850,000$ 850,000$ 12,711$ 106,146$ Difference in Depreciation 11,802$ 84,352$
2004 Total Depreciation 12,711$
Cost Depreciated Over 39/15/7/5 Years:
MACRS General Depreciation System Schedule: MM/MQ/HY Conventions
Scenario 2:- Using Cost Segregation
Scenario 1:- Original Method
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Best B
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Sample Report –Tax References Per IRS Guidelines
Tax References
•2004 U.S. Master Depreciation Guide, CCH Inc: …*** Revenue Rulings:
• Rev. Rul. 69-558, 1969-2 CB 4 Definition of section 38 Property • Rev. Rul. 75-78., 1975-1 CB 8 Factory air handling and safety • Rev. Rul. 75-137, 1975-1 CB 74 Dredging and excavation costs • Rev. Rul. 75-77, 1975-1 CB 7 Factory air conditioning and heating units • Rev. Rul. 81-240, 1981-2 CB 11 Individual room refrigeration units; warehouse • Rev. Rul. 80-93, 1980-1 CB 50 Land preparation costs; Electric and gas distribution systems
Regulations:…**
• 1.48-1 • 1.48-(a)(1) • 1.48-(e)(1) • 1.48-(e)(2) • 1.48-(c)
Revenue Procedure 88-35 LSMB Field Directive
Court Cases:
• Hospital Corp of America, et. Al. v. Commr, 109TC No.2 *** • Morrison v. Commr, T.C. Memeo 1986-129*** • Whiteco Indus., Inc. v. Commr, 65 T.C. 664,672-673(1975)*** • Central Citrus Co. v. Commr, 58 T.C. at 374*** • Scott Paper Co. v. Commr, supra,*** • Fed. Sav. And Loan Association v. United States, 313 F. Supp 294-96 ***
* Denotes, in text ** Denotes, referenced in text *** Denotes, reference material
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
The Cost Segregation Study Process Continued…
Landscaping
Site Work
Electrical
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
Best B
ottom Lines, LLC
The Cost Segregation Study Process
Prepare final reconciliation
Prepare final report
Deliver Draft
Review with tax advisor
Deliver Final Study with sample 3115
Best B
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Best B
ottom Lines, LLC
Best B
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Summary
• Time Value of Money
• Dramatic reduction in taxable income
• Increased cash flow for investment opportunities and business expansion
• Property tax savings
• Insurance savings
www.bestbottomlines.com
(888)-598-9667
Best B
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Best B
ottom Lines, LLC
Best B
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I.R.C § 1031: Key Points
A 1031 Exchange rolls the gain from the sale of an Old Property into a New Property - Without having to pay tax
There is no limit to the number of times you can do a 1031 Exchange– Hold Property 1 year + 1 day
Best B
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Best B
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Best B
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Property Use and Title
Property given up and property received must be held for productive business use or investment– Real Property– Personal Property
Property given up and property received must be held by the same taxpayer (i.e. Same Tax ID #)
Best B
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Best B
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Best B
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Timeline Rules
45 Day Identification Period– The Exchangor must identify the potential replacement
property by midnight of the 45th day from the date of the sale
180 Day Exchange Period– The Exchangor must acquire the replacement property by
midnight of the 180th day, or the date the taxpayer must file its tax return (including extensions) for the year of the transfer of the relinquished property, whichever is earlier
Best B
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Best B
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Best B
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§1031 Exchange Timeline
45/180 Day RulesStart
Day 1Identification Date
Day 45
Finish
Day 180
Close of Escrow
On Sale Property
(Net Proceeds to AEC)
ID Form Due
To AEC
Close of EscrowOn Purchase
Property(AEC to fund
proceeds)
Best B
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Best B
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Best B
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Replacement Identification Rules
3 Property Rule – Three properties of any valueOR
200 Percent Rule – Any number of properties as long as their combined fair market value does not exceed 200 percent of the value of the sold property
OR95 Percent Rule – Any number of Replacement Properties, of any value, but only if the Exchangor buys at least 95% of the aggregate fair market value of all identified Replacement Properties
Best B
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Best B
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Best B
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Reinvestment Requirement
Equal or Up– Purchase price of NEW Property must be
equal to or greater than the net selling price of OLD Property
Reinvest All The Cash– You must reinvest all of the cash. Any cash
you touch will be taxable
Best B
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Best B
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Best B
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Constructive Receipt
What is Constructive Receipt?
Main Reason Taxpayers ‘flunk’ §1031– Funds credited to taxpayer account or made available for
use– Funds credited to a “Disqualified Person” on behalf of
taxpayer are treated as credited to taxpayer
Safe Harbor from Constructive Receipt – Qualified Intermediary
Best B
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Best B
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Best B
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Functions of QI
Prepare Documentation
Act as Trustee– Funds – Deferred Exchanges– Property – Reverse Exchanges
Consulting
Best B
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Best B
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Best B
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AEC 1031 Exchange, LLC
Reverse Exchange
Best B
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Best B
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Best B
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Basic ConceptBuy a New Property BEFORESelling Old Property
AEC 1031 Exchange, LLC
Best B
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Best B
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Best B
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Advantages of §1031 Exchanges
Act quickly to acquire New propertyOld property sale is delayedEffectively extends 45 and 180 time limitsAllows adequate time for Due Diligence
Why Do A Reverse Exchange?
Best B
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Best B
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Best B
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§1031 Exchange Timeline
Reverse Exchange - 45/180 Day Rules
Identification Date
Day 45
Finish
Day 180
Close of Escrow
On New Purchased Property
ID Form Due
To AECClose of EscrowOn Sale of Old
Property
LocateNew
Property
Due Diligence Period
Best B
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Best B
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Best B
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AEC 1031 Exchange, LLC
Key Point
Taxpayer cannot receive and own both OLD and
NEW property at the same time
Best B
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Best B
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Best B
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AEC 1031 Exchange, LLC
Two Reverse Methods1. Give up OLD property to
‘EAT’ before receiving NEW property
2. NEW property is received by ‘EAT’ and held in trust for taxpayer until OLD property is sold
Best B
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Best B
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Best B
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AEC 1031 Exchange, LLC
Business started as Alaska Exchange Corporation (AEC)Over 20 years experience1000’s of Exchanges – all 50 statesInterest paid on trust fundsSpecialize in providing exchange strategies and guidance
