Real Estate Investors Benefit from Cost Segregation for Industrial
Real estate investors in the industrial sector face many obstacles in generating a profit. Finding tenants, collecting rent, containing expenses, understanding market trends for rental rates, occupancy and sales prices are serious challenges for these real estate investors. Property taxes are a serious issue in states where property taxes are high and assessors are aggressive, such as Texas.
The recent trend toward “tech space” and “flex space”, which have a significant portion of the space built out as office area, have increased the challenges and operating opportunities. Traditional industrial real estate such as warehouse and office/warehouse had only a modest expense for tenant improvements. However, the expenses for tenant improvements are substantial for tech-space which increases the risk for marginal tenants.
Cost segregation can ease the income tax burden for industrial real estate investors and owners. Cost segregation affects tax reduction by increasing real estate depreciation. The typical depreciation schedule only has two categories: land and long-life improvements. Cost segregation increases the detail by including up to 130 components in the depreciation schedule. Cost segregation is not the same as component depreciation. While the results are similar, the methodology is substantially different.
Industrial real estate investors can sharply reduce their federal taxes as a result of using cost segregation. Income taxes are reduced since less income is taxed at the ordinary income rate (up to 35%) and more is taxed at the capital gains rate (up to 15%). The total amount of income recognized is the same; cost segregation changes the character from ordinary income to capital gains and defers recognition of the income. Commercial real estate owners pay the capital gains tax rate when they sell their industrial property instead of paying ordinary income tax rates during the years they operate the property (on the incremental depreciation caused by cost segregation). The tax benefits are tax reduction and tax deferral. Tax savings occur because of higher levels of depreciation, a key non-cash tax deduction.
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Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
City:
- Baltimore, MD
- Los Angeles, CA
- Tampa, FL
- Atlanta, GA
- Bridgeport, CT
- Memphis, TN
- Boston, MA
- Dallas/Ft. Worth, TX
- Hartford, CT
- San Francisco, CA
- Columbus, OH
- Portland, OR
- Oxnard, CA
- Youngstown, OH
- Indianapolis, IN
- Albuquerque, NM
- Lancaster, PA
- San Diego, CA
- Raleigh, NC
- Augusta, GA
- Chattanooga, TN
- Oklahoma City, OK
- Riverside, CA
- Des Moines, IA
- Manchester, NH
- Wichita, KS
- San Antonio, TX
- Fresno, CA
- Cincinnati, OH
- Santa Rosa, CA
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Lumber storage
- Retail
- Land
- Hospital
- Supermarket
- Hospital
- Amusement park
- Shopping center
- Used car lot
- Auto service garage
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Wood product manufacturing
- Food manufacturing
- Furniture manufacturing
- Textile product mills
- Air transportation
- Electronic and appliance stores
- Day care facilities
- Textile mills
- Building supply dealers
- Beverage and tobacco product manufacturing
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