The client had acquired a large suburban property in the late 1990s. He soon converted the space into an auto parts warehouse, and over the next two decades installed a great deal of specialty equipment, including custom-built mezzanines. The client also installed several office fit-outs. Recently, the client decided to convert the warehouse space into a fitness center, which would require much renovation and the disposal of a significant amount of equipment. Changing the nature of the space meant that the owner’s tax needs would change, as well. The client approached Capstan for tax strategies that would best enhance the property’s new direction.
The Capstan team assessed the client’s situation and offered a three-pronged approach to best maximize tax savings. First, Capstan recommended a cost segregation study to generate immediate tax savings. Next, the Capstan team suggested a Unit of Property Survey to generate a cumulative listing of assets by category, and lay the foundation for long-term savings. Finally, the team recommended that the client take advantage of the new Tangible Property Regulations through a ReCap study. The ReCap study would identify assets that had initially been capitalized but would be expense eligible under the recently passed regulations. The Capstan team expected to find assets of this nature in the property’s office spaces.
The client was pleased with this approach, and was particularly intrigued by the fact that the large amount of specialty equipment removed from the warehouse could be leveraged for potentially significant tax savings.
The scope of this project was daunting, encompassing many “moving parts” over multiple dates of service. The Capstan engineer painstakingly recreated accurate representations of the property through the years. He used depreciation schedules, demolition drawings, old photographs, and extensive owner interviews to piece together the complete evolution of the property. The attention to detail required was immense—and so were the rewards.
In the cost segregation study, the engineer was able to move 14% of the depreciable basis into five-year property, resulting in an immediate savings of nearly $500,000. Furthermore, the engineer was able to identify and expense more than $150,000 of improvements to office fit-outs that had initially been capitalized. Most significant, however, was the partial asset disposition: 11% of the depreciable basis was eligible for immediate write-off, representing more than $920,000 of ghost assets.
Capstan issued the client “The Capstan Warranty,” which provides audit support up to the field agent level at no additional cost should the project ever be audited by the IRS.