In the mid-2000s, two partners purchased a multi-story office building in a major metropolitan area. Within a decade, the partnership had dissolved and the property was listed for sale. Our client was subsequently able to reacquire the property as a sole owner, and planned several renovations and tenant improvements. The client approached Capstan in order to capitalize on his recent reacquisition, and to discuss long-term tax strategies.
The Capstan team validated the client’s instinct, noting that the property’s recent reacquisition and resulting new depreciable basis laid the groundwork for a highly successful cost segregation study. The Capstan engineer also suggested that the study scope include two tenant spaces that underwent significant client-funded renovations.
In light of the client’s plans for further improvements and renovations, Capstan recommended a two-phase process. In Phase I, the engineer would conduct both a cost segregation study as well as a thorough unit of property analysis, to generate and categorize a complete list of all assets. Phase II would follow after the completion of renovations. The same Capstan engineer would revisit the property and complete a careful re-analysis, in order to allow for potential disposition of ghost assets or reclassification of capitalized assets.
The time was indeed right for a successful cost segregation study. The Capstan engineer was able to move 8% of the total depreciable basis into personal property, resulting in an immediate tax savings of over $600,000. The results in the individual tenant spaces were even more impressive. The team recognized that all upgrades met the “Qualified Leasehold Improvements” criteria, and went on to carve out 5-year property assets as well. In one tenant space, the engineer was able to move $450,000 worth of assets (half the depreciable basis) into 5-year, while classifying the remaining $450,000 as 15 year. The implications for tax-savings were staggering.
The engineer also completed the unit of property analysis, generating a breakdown of all building systems and historic assets. The client was pleased to have been offered this useful tool for future tax savings.
When renovations are complete, the same engineer will revisit the property to carefully assess structure and contents and will compare his results to the previously compiled unit of property analysis. The engineer will then identify ghost assets eligible for partial asset disposition, as well as previously capitalized assets that may be now expensed under the Tangible Property Regulations, in order to maximize tax-savings.
As always, Capstan issued “The Capstan Warranty” to the client which provides audit support up to the field agent level at no additional cost should the project (in either phase) ever be audited by the IRS.