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Tax Alert – After Tax Reform: Does Depreciation Recapture Have the Same Impact for Investors?

By Eli Varol, Senior Director, Cost Segregation, Valuation & Advisory

Tax Reform has impacted many aspects of real estate investment. In this memo, I outline how it can impact investor’s go/no-go decisions in relation to pursuing the Cost Segregation tax strategy for property held for a limited term.

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What Has and Has Not Changed

The Tax Cuts and Jobs Act of 2017 (“TCJA”) has made the following changes that are relevant for this analysis:

tax-reform-before-tcja-after-tjca

Representative Example

The table below illustrates the benefit from a cost segregation analysis of a typical property with the following characteristics:

  • Acquisition of existing residential property
  • $8M depreciable basis
  • 6% present value discount factor
  • No like-kind exchange at time of disposition

The net benefit of the Cost Segregation is shown for various holding terms, inclusive of the negative impact of depreciation recapture tax.
tax-reform-cost-segregation-table-2

Evaluation

tax-reform-evaluation-table 3

Impact

In the above example, for a three-year hold, the benefit before TCJA is $3,626. This is not enough to justify the cost of a typical Cost Segregation analysis. If an investor is concerned that they might not hold a property for more than a few years, they would not want to pay for a Cost Segregation analysis that may provide little to no benefit. However, the benefit for the same property after TCJA is $44,436. This is well above the typical fee for a Cost Segregation analysis. Knowing that a benefit is achievable, even if the investor ends up selling the property in the short-term, should make investors more comfortable with employing the Cost Segregation tax strategy at the time of acquisition.

Our Recommendation

For clients investing in new and existing property, we recommend considering the Cost Segregation tax strategy. Cushman & Wakefield can provide customized benefit projections and fee quotes as a courtesy.

eli-varol-cost-segregationEli Varol is a Senior Director in the Cushman & Wakefield Valuation & Advisory group. Eli has been practicing Cost Segregation consulting for more than 19 years and is a Senior Member of the American Society of Cost Segregation Professionals. He graduated with a Bachelor of Science in Mechanical Engineering and a Masters of Business Administration, both from Washington University in St. Louis.

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