Office Building Tax Strategy Case Study
In the mid-2000s, two partners purchased a multi-story office building in a major metropolitan area. Within a decade, the partnership dissolved and the property was listed for sale. Our client subsequently reacquired the property as a sole owner, and planned several renovations and tenant improvements. The client retained Capstan 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. This new depreciable basis laid the groundwork for a highly successful cost segregation study. The Capstan engineer also suggesting 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 conducts both a cost segregation study as well as a thorough unit of property analysis, generating and categorizing 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.
Through a cost segregation study, the Capstan engineer was able to move 8% of the total depreciable basis into personal property. Thus 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. This study will generate a breakdown of all building systems and historic assets. The client is 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. Furthermore, the engineer will compare results to the previously compiled unit of property analysis. Identification of ghost assets eligible for partial asset disposition, as well as previously capitalized assets that may be now expensed under the Tangible Property Regulations, will be maximized for tax-savings.
As always, Capstan issues “The Capstan Warranty” to the client. This will provide audit support up to the field agent level at no additional cost if there is an IRS audit (in either phase).