| Apartment owners can face staggering expenses | | | | typically replaced after five years of |
| to maintain apartment communities. The upkeep | | | | use.Wide Range of Applications |
| of even a modest community could involve | | | | |
| groundskeeping, unit renovation, and | | | | Whether the community was recently |
| replacements, such as parking lot asphalt and | | | | purchased, has been owned for a while or is |
| fencing. Another steep expense is federal | | | | on the market to be sold, a cost segregation |
| income tax - and in some areas an additional | | | | analysis can help at any stage of ownership |
| state tax on income - but through an | | | | by reducing federal income taxes and showing |
| innovative study known as cost segregation, | | | | future depreciation. The optimum time to do |
| the depreciation of property components can | | | | this is preferably as soon as ownership is |
| be used to help lower federal taxes.Today, | | | | taken, whether the property was bought or |
| more apartment investors, especially those | | | | built. Any commercial property built after |
| whose occupancy rates are challenged by the | | | | Dec. 31, 1986, is eligible, and there are |
| nation's single-family housing, are taking a | | | | "catch-up provisions" to accommodate higher |
| close look at every possible avenue to lower | | | | savings in the first year when a cost |
| costs. That's a frustrating task in the | | | | segregation study is completed for |
| apartment business. One historically | | | | communities that have been owned for several |
| underused technique for saving money, in this | | | | years.Communities of all sizes can benefit, |
| case saving taxes, is to ensure that all | | | | from small communities of fewer than 10 |
| depreciable items are reflected accurately on | | | | apartments to communities that span several |
| tax returns.Those items are not limited to | | | | city blocks. If the property has an assessed |
| copiers, automobiles and heavy equipment. The | | | | value of at least $200,000, the cost |
| list extends to a wide range of buildings and | | | | segregation evaluation can almost always |
| improvements. In fact, the IRS recognizes 130 | | | | produce substantial federal income tax |
| items that depreciate over much shorter time | | | | savings.Preparing for a Study |
| periods than the standard depreciation of | | | | |
| 27.5 years for an apartment community. Many | | | | A small amount of an owner's time is |
| of those items, such as parking surfaces, | | | | required when working with a consulting firm |
| landscaping and even certain wall coverings, | | | | that specializes in cost segregation. And it |
| are present in large proportions on typical | | | | is advisable for the owner's CPA or tax |
| apartment communities.A cost segregation | | | | accountant to collaborate with the |
| analysis, when reflected on deprecation | | | | consultant, ensuring the most advantageous |
| schedules, reduces taxable income now and | | | | application for that owner's particular |
| also defers taxes on capital gain amounts | | | | financial circumstances.The original purchase |
| until the community is sold. At that time, | | | | price of the apartment community is the cost |
| the recapture of taxes on the extra | | | | basis, so owners receive savings on their |
| depreciation taken can occur at a much lower | | | | initial investment, as well as on |
| rate than the 35 percent max tax rate that | | | | improvements. With research that is both |
| was avoided with the extra losses.Don't | | | | quantitative (square footage of asphalt, |
| forget the time value of money by deferring | | | | pavement, ect., or quantities of wall or |
| that inevitable tax by a few years. In light | | | | window coverings, ect.) and qualitative |
| of the 130 IRS-identified "short life" items, | | | | (judgment of remaining life) a specialized |
| this conservative tax-planning tool can help | | | | analysis and calculation is conducted before |
| apartment owners allocate more costs to | | | | a report is issued. This report becomes the |
| five-year, seven-year, 15-year and 27.5-year | | | | backup documentation for federal income tax |
| improvements versus the land value on | | | | returns.Patrick O'Connor, MAI, is president |
| apartment communities.Apartment communities, | | | | of O'Connor & Associates. The firm, in |
| according to IRS rules, depreciate over the | | | | business since 1974, specializes in state and |
| course of 27.5 years. This is 10 years less | | | | federal tax reduction services, real estate |
| than the depreciation estimated for office, | | | | appraisals and research and consulting |
| retail and industrial properties, which equal | | | | nationwide. With offices in Houston, Dallas, |
| quicker savings for apartment community | | | | Los Angeles and Newport Beach, the firm |
| owners. Items that are found in every | | | | employs more than 130 people. Patrick |
| apartment, such as carpet, linoleum, window | | | | O'Connor is frequently acknowledged by |
| treatments and appliances, are categorized as | | | | national publications as a respected source |
| five-year items, meaning that they are | | | | of information on real estate trends. |