Tax Tricks - Building Depreciation

Tax Tricks! - Building Depreciation
Dear Agatha the Auditor,

I have been looking at the real estate market here in Arizona and boy is it HOT!  I am really interested in buying a piece of commercial property, renting it out to some tenents, but I've heard that even though I buy this really expensive building, I can only write off a little bit over each of the next 39 years?  There has to be more of an incentive to buy this thing, isnt' there?????

Help,

Sticker Shocked in Scottsdale,

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Dear Sticker Shocked in Scottsdale,

It is true that the regulations say that real property in the form of commercial buildings is depreciable over 39 years (meaning you only get to write of 1/39th of your purchase price each year), however there is hope!

The IRS uses something called class lives for each different type of property.  So, for example:

- Commercial Buildings - 39 years
- Residential Rental Properties - 27.5 years
- Land Improvements - 15 years
- Building Improvements - 3-15 years (depending)

Of course, what this means, is that if you as a building owner have something called a "Cost Segregation Study" performed on your building, you will have additional depreciation for the first years you own the building.  This is great if you are planning on selling the building after 10 or so years.

Now, Sticker Shocked in Scottsdale, please realise that most Cost Segregation Studies are not cheap, but, even if it takes a 1,000,000 building from situation A to situation B you are getting quite an additional benefit.

Situation A: 1,000,000 at 39 years = 25,641 / year
Situation B: 1,000,000 - 70% at 39 Years = 17,949
                                 - 30% at 5 years = 60,000
                                   -------------------------------------
for a total of                                            77,949

in depreication - the savings are worth the cost!

Of course, talk to your CPA regarding the details of your building and what else can be done to help you deduct additional depreciation, but remember to look in the little places for BIG deductions!

Yours,

Agatha the Auditor