Acquired in 1986, this multi-family high rise in the heart of a major East Coast city had undergone frequent and significant improvements over the past 20 years. In 2013, a partner buyout significantly increased the depreciable basis—prompting the client’s CPA to recommend a call to Capstan to work through a proactive tax strategy. Capstan reviewed the depreciation schedule and the step-up amount for the buyout of the 50% partner, as well as the scheduled renovation plan. Many of the assets replaced over the years had been classified as capital improvements, creating significant potential for the reclassification of assets using the newly mandated Tangible Property Regulations.
The Capstan team recommended two techniques to maximize tax savings:
- First, Capstan suggested that the 2013 ownership adjustment warranted a full Cost Segregation Study to accelerate depreciation of the now much-larger basis.
- Second, Capstan recommended that in light of the decades of capitalized renovations, the client consider a Unit of Property (UoP) study to take advantage of the Tangible Property Regulations. There were many capitalized assets on the depreciation schedule that could be expensed based on Routine Maintenance Safe Harbor, Betterment/Adaptation/Restoration (BAR Testing), and Materiality Testing. In addition, Capstan recognized an opportunity to write off ghost assets that had long ago been removed from the property.
The client pursued both avenues of tax savings and was extremely pleased with the results. In the Cost Segregation Study, Capstan engineers were able to move 22% of depreciable basis from real property to personal property and land improvements, resulting in a tax savings of more than $1.4 million.
Furthermore, engineers were able to identify and reclassify almost $500,000 worth of originally capitalized assets that were not, in fact, betterments—allowing the client to write off these assets in accordance with the new Tangible Property Regulations. The reclassification was a challenge due to the large scope of the renovations as well as the nebulous descriptions in the supplied documents. However, Capstan engineers took the time to meet with a long-term property manager and obtain the full and thorough renovation history necessary to document and support the write-offs—and maximize the results.
Once the project was complete, Capstan issued “The Capstan Warranty,” which provides the client with audit support up to the field agent level at no additional cost should the project ever be audited by the IRS. In addition, Capstan is available to help the client in further accelerating depreciation once the planned renovation is complete and in continuing to assess expense-versus-capitalization decisions going forward.