Good Things Come in Small Packages:  Tax Reform Increases the Utility of Cost Segregation on Smaller Properties

Photo by Blake Wheeler on UnsplashConventional wisdom has generally been that cost segregation studies are only worth performing on properties with a minimum depreciable basis of $1M. Most people figured that the savings accrued on a smaller study wouldn’t even cover the cost of the study itself. Hard pass.

Not so fast. The recent passing of the Tax Cuts and Jobs Act (TCJA) is changing the rules, and it’s time to reevaluate conventional wisdom. Under the PATH Act, Bonus depreciation was fixed at 50%, and only new assets were eligible for Bonus. The TCJA has boosted Bonus depreciation to 100% for four full years. Furthermore, under the TCJA acquisitions are also eligible for Bonus treatment. Qualifying assets no longer have to be new to be Bonus-eligible; they just have to be “new to you,” and as such it’s worth taking a closer look at smaller basis properties. Properties that wouldn’t have warranted a study last year might make excellent candidates for a study in the post-TCJA era.

More and more taxpayers are commissioning studies on acquired properties, smaller properties, and 1031 exchange properties with relatively small step-ups in basis. It’s well worth reassessing the fitness of these properties in light of the TCJA, especially considering that the price of the study itself is commensurate with the size and complexity of the property. Smaller property – lower cost of study – even better return on your investment.

For example, consider two three-family rental homes on the same block. The total basis for both properties is $750K. Engineers were able to move 13% of qualified assets to 5-year class life and 5% to 15-year land improvements. With a basis of $750K, a project like this probably wouldn’t have been considered a viable candidate for cost segregation in the past. But take a look at the TCJA-effect, which almost triples the additional first year cash flow:

Pre-TCJA Post-TCJA
Additional First Year Cash Flow $17,679 $49,512
10-Year NPV $27,239 $35,643

If you or your client deals in smaller-basis real estate, it might be time to consider cost segregation as a viable tax strategy. Please reach out to the Capstan team at any time for your no-cost consultation and Estimate of Benefits. We’ll help you figure out if cost segregation is worth your while, and help you make the most of your real estate – whatever size it might be.

Photo by Blake Wheeler on Unsplash