Commercial Property and Real Estate Depreciation Defined
The term commercial property (also called commercial real estate, investment or income property) refers to buildings or land intended to generate a profit, either from capital gain or rental income. Commercial building owners investing in real estate are tasked with handling the management, maintenance, taxes, insurance and accounting of the property. Commercial real estate can include land, building(s), and associated land improvements that are either constructed or acquired from an investor or a business entity.
Examples of commercial buildings include industrial, warehouses, manufacturing, offices, shopping centers, supermarkets, retail, restaurants, hotels, motels, casinos, entertainment, auto dealerships, self-storage, hospitality, hospitals, MOB’s, etc. Apartments and rental homes are considered residential property that qualify for a shorter building depreciation life than commercial buildings.
Commercial Real Estate Depreciation
Commercial and residential building assets can be depreciated either over 39 year straight-line for commercial property, or 27.5 year straight line for residential property as dictated by the current U.S. Tax Code. The Internal Revenue Service (IRS) allows building owners the opportunity under the Modified Accelerated Cost Recovery System (MACRS) to depreciate certain land improvements and personal property over a shorter period than 39 or 27.5 years. Certain land improvements can be depreciated over 15 years at 150% DB, with certain personal property depreciated over 7 or 5 years at 200% DB. This depreciation analysis is known as a cost segregation study.
For example, the plumbing costs associated with installing a 3/4″ copper pipe connected to a restroom sink in a supermarket building must be depreciated over 39 years. That same 3/4″ pipe installed to a bakery sink qualifies as a 5 year write-off. The restroom sink is related to the operation of a building, the bakery sink is related to the taxpayers business. All buildings, commercial or residential, will be in need of repairs over time. Anyone who has owned commercial or residential rental property for any length of time knows that it will need maintenance, repairs and renovations as the years go by. Recent tax legislation known as the Tangible Property Regulations (TPR) allow building owners to dispose of assets as they are replaced.
Take Advantage of IRS Allowed Tax Benefits to Owners of Commercial & Residential Rental Properties Utilizing a Cost Segregation Study.
The only way to have these components segregated is to have a detailed engineering-based Cost Segregation study performed on your property. Since 1993, Ernst & Morris Consulting Group, Inc. (E&M) has been providing hundreds of CPA firms and clients across the country with our engineering approach to Cost Segregation, which includes our work paper documentation and detailed engineering based report that has survived IRS Audits for nearly 25 years. Our professionals possess over 150 years of combined Cost Segregation experience, solely with E&M.
BONUS: The IRS allows current building owners to go back as far as 1986 and “catch up” on the depreciation they should have been deducting from the day the property was placed in service WITHOUT AMENDING PRIOR TAX RETURNS.
All of the additional depreciation found as a result of our detailed engineering-based approach is taken in the year of the election.
According to a recent article in the AICPA’s Journal of Accountancy,
“Selecting a firm that uses qualified professionals with years of significant, relevant experience can be an important differentiator in the quality of a cost segregation study.”
Journal of Accountancy
© From the AICPA