Property Cost Allocation (aka “Cost Segregation”) is back with a vengeance, according to GMG Savings in a recent article.
A cost segregation study is an essential fiduciary component when building, purchasing, or renovating a hotel or motel. Hotel owners and operators who do not work with a qualified expert to perform a cost segregation analysis could miss the opportunity for significant tax benefits.
What are some potential benefits? Cost Segregation is an engineering-based tax analysis where certain non-structural components of a building are broken out and allocated to a shorter life class, depreciating them at an accelerated rate. This process reduces a taxpayer’s federal and state taxable income.
Every hotel and motel have highly trafficked areas, such as entries and hallways. Most depreciation schedules will reflect all assets depreciating over 39 years, but that does not always necessarily bring the most benefit to the owner/operator.
Cost Segregation provides a solution to this problem because it applies Modified Accelerated Cost Recovery Systems to short life assets thus accelerating the depreciation and reducing the owner/operator’s income tax burden. Examples of this benefit in action:
- New purchase or construction will result in increased cash flow in the first 6 years.
- If owned for 5 or more years — qualifies for all unrealized depreciation carried forward into the current tax year.
- Purchased or constructed from January 1, 1987 — all improvements and renovations will qualify based on individual completion dates.
Return on investment for participants in Cost Segregation is typically quite high, often yielding up to 200% on investment. There is a standard fee involved when engaging in this process that is generally between ten to twenty thousand per building and is dependent on size, quality of construction, location, construction documents, closing statements, etc.
Call Gulati law at (407) 900-5054 so that we can answer any questions you may have regarding these matters.
Source: GMG Savings Support Center