Cost Segregation for Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) bring in big money and are perfect candidates for cost segregation. All of the depreciation targets common for apartments apply here, but things are turned up to 11. The rental units themselves are sources of both short-life and long-term depreciation, but so are things like plumbing, fixtures, and other items.
Beyond the rental units, common areas, parking garages, parking lots, exterior lighting, fencing, and dozens of other assets can contribute to reducing income taxes. A cost segregation run by O’Connor will hit all of the variables that the IRS labels as “units of property.” The IRS requires accurate methods, documentation, and results, and an expert partner is key to meeting all of these requirements.
Cost segregation can have a strong upfront cost, but for REITs, this is often quickly absorbed by staggering savings in income tax. If the stars are right and there are escalating depreciation factors that can be used, an REIT could see the expense of the cost segregation study paid back 150-1. The following table shows other REITs that were helped by O’Connor in the past.
Real REITs that Saved with O’Connor
| Depreciable Basis | Purchase Date | Year of Study | 1st Year Additional Depreciation | 1st Year Tax Savings | Year 1 Payback | Initial 5 Years Tax Savings | 5 Year Payback |
|---|---|---|---|---|---|---|---|
| $59,116,128 | 5/1/2016 | 2016 | $1,756,827 | $695,703 | 204.0:1 | $3,129,372 | 917.0:1 |
| $40,448,736 | 1/1/2016 | 2016 | $2,052,362 | $812,736 | 265.0:1 | $2,112,608 | 691.0:1 |
| $30,179,568 | 9/1/2015 | 2015 | $938,561 | $371,670 | 121.0:1 | $1,462,987 | 479.0:1 |
| $45,946,624 | 9/1/2015 | 2015 | $1,612,584 | $638,583 | 209.0:1 | $2,632,554 | 861.0:1 |
| $36,926,224 | 6/1/2016 | 2016 | $1,179,386 | $467,037 | 153.0:1 | $2,002,418 | 655.0:1 |
Results
* Results from “Catch Up” studies which allow the owner of properties purchased in previous tax years to benefit from cost segregation in the current tax year without filing amended returns.
NOTE: The above listed tax savings are based on a 39.6% tax rate for the owner.