The act of cost segregation – separating business and personal assets for the purpose of income taxes – has been in practice for decades, since 1954 to be exact. The government put this act into place to allow property owners a more accurate way of reporting their incomes. However, recent events and complains have caused these practices to take a significant jump as of late – changes that work toward the benefit of self storage facility owners.
In 1997, according to an article from SegregationHolding.com, the Hospital Corporation of America sued the IRS, and won – causing the IRS to change its former cost segregation standards. Then, in 2004, the issue was addressed once again, creating the Tax Act of 2004, which says, “…cost segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.”
Self Storage and Cost Segregation
Self storage facilities can be put into two different categories, said the article, those that are climate controlled, and those that are not. Units that are climate controlled require higher operating costs, as well as higher building costs. These units also provide more customer options, which is to say they can store more expensive items; ones that cannot withstand extreme temperatures. Because of these additional options and costs, cost segregation “can often uncover as much as 85 percent qualifying tangible personal property, [where] tangible personal property is considered a five-year asset under IRC sec. 1245.” Properties which can qualify under this description include security systems, HVAC, fences, landscaping, solar and wind systems, etc., said the article. These items can also qualify for an accelerated depreciation program, under the IRS’ Modified Accelerated Cost Recovery System (MACRS) program.
In comparison, “real property” is filed under IRC sec. 1250, and is considered a form of property that depreciates over a 39-year period.
And as for those facilities that don’t contain climate-controlled capabilities, they aren’t far behind either. Non-climate controlled units can claim “upwards to 65 percent qualifying tangible personal property.” Not bad numbers for those who own either type of facility.
Real Estate Trends
The self storage real estate market has also changed significantly over the past few years. Figuring cost segregation rates is now an important factor to determining the value of a facility. Potential buyers should find a facility’s cost segregation rates in order to find an accurate insurance rate, property value, and net worth for tax purposes. Failing to consider the correct cost segregation can change these numbers drastically, usually against the favor of the potential buyer.
When in doubt, refer to the simple list provided by Segregation Holding, which breaks down the benefits of cost segregation to self storage facility owners.
Cost Segregation:
- Cost segregation identifies all building components qualifying for accelerated depreciation
- Cost segregation is basis for accurate appraisal
- Cost segregation lowers real estate tax bill
- Cost segregation lowers property insurance premium
- Cost segregation ensures accurate identification of assets in case of fire or theft
- Cost segregation delivers cash in the critical first five years of self-storage business ownership
There are multiple financial benefits for self storage facility owners. Take cost segregation into account before purchasing a new property, and be sure to look at all your options with those you already own. You may just find that your assets can work in your favor.