Retirement of Structural Components is a Permanent Tax Savings
Example: Taxpayer acquired $5M building in 2007:
- In 2010, they spent $1M to remodel a portion of the 2nd floor (ceilings, walls, lighting, plumbing, ducting, electrical wiring, etc.)
- Cost Segregation was already performed in a prior year for the 2007 purchase and for the 2010 improvements.
- In 2012 KBKG performed a “Retirement Study” to determine that the original cost basis of the demolished components is $470K (from the original $5M building)
- The client recognized a loss of $404K in the 2012 tax year by filing a Form 3115 "Automatic Change of Accounting Method". (original cost basis less depreciation already taken)
If the client continues to depreciate the $470k through the life of the property,
they will recapture all of it upon sale:
- Let’s say that $470K consists of 39-year property equal to $370K and 7-year property equal to $100K
- Recapture Tax = $127,500 ($370K X 25% + $100K X 35%)
If they do a Retirement Study:
- Recapture tax on the $470K = 0
- Capital gain tax = $94,000 ($470K X 20%)
In addition to the accelerated write-off of $404K, there is an additional permanent tax savings of $33,500 upon sale.