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