Abandonment Studies - Find the Value in Demolished Tenant Improvements

Advisory bulletins for those involved with real estate -- owners, investors, REITs, CFOs, accountants, lenders, brokers and attorneys.

Abandonment Studies - Find the Value in Demolished Tenant Improvements Depreciation of tenant improvements is a difficult process to execute effectively. In many cases, owners claim less depreciation than is possible, appropriate and lawful. This is particularly true for tenant improvements which have been demolished. Accurately depreciating tenant improvements can substantially reduce income tax liability and increase both cash flow and total investment return. An abandonment study can legitimately generate a windfall of depreciation for the owner of either investment or owner-occupied real estate. An abandonment study is appropriate when it is necessary to demolish tenant improvements within a building. Upon demolition, the undepreciated basis for the tenant improvements can be deducted in the year in which it is realized they no longer have value or when the demolition occurs. The current owner can deduct the undepreciated cost of the tenant improvements even if the prior owner disbursed payments for the tenant improvements. If the current owner paid for the tenant improvements, the remaining cost basis is simple to calculate. However, if a prior owner paid for the tenant improvements, it is unlikely cost data is available to the current owner. Further, even if cost is available to the current owner, that cost is not necessarily the current owner’s initial or undepreciated cost basis. The current owner can determine the undepreciated cost basis for the tenant improvements which are being abandoned by obtaining a cost segregation abandonment study. This analysis will identify a replacement cost new of the assets, extract an appropriate cost basis for the improvements (which are being abandoned) from the current owner’s purchase price and calculate a depreciated cost basis which may be deducted from the tenant improvements. Following are several examples of atypical tenant improvements which are unlikely to benefit a subsequent tenant: 20,000 square feet of space for a bank in an area which has an excessive number of banks (and where bank branches average 3,000 square feet); an independent physician who has 5,000 square feet of space; 50,000 square feet of space mostly apportioned to very small patient rooms for health insurance physicals; office space built out in such a luxurious manner as to accommodate only 1.3 people per 1,000 square feet; » Get a complimentary estimate of tax savings on your property » Visit our NEW source for the latest up-to-date commercial real estate news! Please send me periodic real estate information. O'Connor & Associates -- Your Key to Real Estate Value Corporate Office: 2200 North Loop W., Suite 200 Houston, TX 77018 1-800-856-7325 Dallas * Houston * Los Angeles * Newport Beach If you would like to be removed from this list and receive no future real estate information, click here to unsubscribe.	Cost Segregation Benefits Convert ordinary income to capital gains income Defer federal income taxes Effective for properties with a cost basis as low as $500,000 "Catch-up" under-reported depreciation without filing amended income tax returns Free preliminary analysis About O'Connor & Associates O'Connor & Associates is a real estate consulting services firm, conducting business nationwide. Our professional staff in Houston, Dallas, Los Angeles and Newport Beach is available to help you with your tax, business and real estate valuation matters, including cost segregation studies, commercial real estate appraisals, commercial property tax reduction and litigation support. Hire O'Connor & Associates to save thousands through federal and ad valorem tax reduction. Visit us at www.poconnor.com.