Case Study:
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)

Retirements convert recapture tax into capital gains. If you incorrectly continue to depreciate 1245 & 1250 property that was removed from a building, you pay recapture tax upon sale:
· 1245 recapture is at ordinary rates (35%-41%)
· 1250 recaptured at 25%
· Capital Gains are typically taxed at 20%

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.

Getting More Information:
KBKG can quickly review your tax depreciation schedule to determine if there is an opportunity.
Call us today or fill out our form to see if you qualify.