David Moore with Equity Advantage asks the expert Jonathan Frizzell with CBRE about cost segregation. Learn when a cost segregation study should be performed and find out some of the common misconceptions about cost seg. Get advice from the experts to maximize your investment options.
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When Should A Cost Segregation Study Be Done?
David Moore: If I came to you and say, “Hey, Jonathan, I’ve had this property for the last 20 years. Can you deal with it, or if I’m closing something next week, can you deal with it?” Or, “I sold it. Can you deal with it?” How can what you do be applied to a person’s portfolio of property?
Jonathan Frizzell: Good question, David. We’d actually like to take a look at both of them. Certainly upon acquisition after closing. We can also—for the banker and the broker—run the analysis on an estimated closing price, closing date. And then even 15, 20 years of service, we still want to look at it. It’s more than likely there’s going to be improvements after that. My record is 54.5 percent of the depreciation: 54.5 percent was gone on this old warehouse up in Seattle, and there is still value for the client. Sometimes people believe that after five, seven years of service, there’s little or no benefit in cost segregation, and that’s simply not true.
David Moore: So you don’t have to feel like you missed your opportunity if you haven’t done it, and you’ve had the building for a while. You still have the opportunity to go back. Jonathan can fix it for you.
Jonathan Frizzell: That’s right. The IRS calls that a look-back study. I happen to call it a catch-up study because what happens is that you can go ahead and catch up on that depreciation that you would have gotten the first year of service, and there’s a thing called a 481(a) adjustment. We’re happy to calculate that for the tax professional to make it a turnkey application.
David Moore: Of course, not everyone works with a tax professional. What if someone wants to take it on themselves—how do you feel about that? Do you ever say, “Hey, you really can’t afford not to deal with this” or, “We have to be really careful with this”? What is the downside of a cost seg?
Jonathan Frizzell: Well, the downside would be if you’re selling it tomorrow. There would be no value. You have recapture and capital gains issues.
David Moore: You just got more gain.
Jonathan Frizzell: Yes, you definitely want to hold it for at least two or three years. I like to say more conservatively four or five years. I’ve got one real estate professional in LA, and he cost segs in 1031s, and he comes to me, and he’s exchanging and cost segging in 1031 every two years. It’s multifamily, triple net, retail, you name it. And he comes to me for all that work. It just depends on the individual. Our commitment at the cost seg group at CBRE is to make this as turnkey as we can for the tax professional and the owner. The burden and the fiduciary responsibility is really on us, not only on the analysis. Even after engagement, it’s to go ahead and get exactly what we need, and get that data, and then do the on-site review, and then get it to engineering so we can deliver it.
What are Some Misconceptions about Cost Segregation?
Jonathan Frizzell: Whether it’s the controller, the CFR, the tax professional, the CPA or the enrolled agent, people tend to think that it seems like it’s a lot of work. But if you get a high-quality cost seg professional, there should be no work.
David Moore: Well, it’s work for you. It shouldn’t be for the taxpayer.
Jonathan Frizzell: Right. It really shouldn’t be. All we need for a no-cost, no-obligation analysis for an estimate of benefits proposal is simply the most current federal tax depreciation schedule and a physical address, and then I’ll do the rest. Then I can run it. I’ll get up in the sky and look at the building, and then I’ll make my suggestions and engineers will get an estimate of benefits and proposal back.
Jonathan Frizzell: But even after engagement, it’s important upon execution that you make a commitment to the owner and the tax professional, what the responsibility is, which is pretty minimal on the documentation that’s needed, and just go ahead and get that to us in a timely fashion, and then we’ll deliver it within four weeks.
David Moore: So the timeline is about four weeks?
Jonathan Frizzell: Yes, it’s about four weeks of client engagement., but sometimes a little longer. My record years ago was actually three or four days.
Jonathan Frizzell: There are a lot of last-minute clients, frankly. I always wonder whether it’s the tax professional or the client. And I’m going to have to err on the side of caution with the tax professional, that oftentimes the client is not getting the documentation to the CPA to even give us a call beforehand. I once did a gas station last minute. I got the engagement in late August, and there was a 15th of September deadline, but we still got it done.
Jonathan Frizzell: Owners/users are often overlooked in cost seg, and I can certainly make it affordable for them as well. You don’t need to have a $5 or a $10 million basis. And I’ve cut my teeth with a lot of families and cleaned up other cost seg work. Then the question is, “Can do a cost seg study on a cost seg study?” And oftentimes, you can.
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