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TAX TOPICS

TAX TOPICS. Chip Chesteen, Chesteen & Associates. Tax Topics Overview. Cost Segregation Leasehold Improvements Income Taxes on Real Estate Sales. Cost Segregation. Allocation of real estate cost to recovery periods: Nonresidential building structure 39 years

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TAX TOPICS

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  1. TAX TOPICS Chip Chesteen, Chesteen & Associates

  2. Tax Topics Overview • Cost Segregation • Leasehold Improvements • Income Taxes on Real Estate Sales

  3. Cost Segregation Allocation of real estate cost to recovery periods: Nonresidential building structure 39 years Residential building structures 27.5 years Land improvements 15 years Personal property 5-7 years

  4. Cost Segregation - Benefits • Increased depreciation write off in early years of ownership • Reduction in “phantom income” for financed property

  5. Cost Segregation – The Process • Cost segregation study performed by qualified outside consultant • Using methodology approved by IRS • New construction studies are easier and cheaper • Studies for existing properties eligible to take deferred depreciation expense in year of election

  6. Leasehold Improvements • Prior Law – write over the life of the structure • Improvements placed in service between May 5, 2003 and January 1, 2005 • Eligible for bonus depreciation equal to 50% of the cost • Some leasehold improvements do not qualify • Cost segregation can apply to leasehold improvements

  7. Income Tax on Sales of Real Estate • Property held less than one year taxed at ordinary income rates • Property held more than one year taxed at federal tax rate of 15% • Depreciation taken in prior years on real estate taxed at 25%

  8. Future Tax Trends • Further development of cost segregation – watch for IRS reaction • Income tax rates depends on election results and budget issues

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