It was a building like any other building. Except it was across the street from their surgical facility. The perfect location for the doctors. It was also affordable. And it had vast potential in that it could be remodeled to suit their exacting needs. So in 2017, the group of doctors pooled their funds and bought the building.
They invested almost $9 million in the property to get it ready for occupancy. Over the course of the project, they learned about an innovative tool that could minimize their taxes and enhance their cash flow – Cost Segregation. By accelerating their depreciation of certain aspects of the physical property they could benefit financially.
The Internal Revenue Service endorses Cost Segregation studies. However, there is a tremendous amount of art to the science, causing many an accountant to walk away from such projects, and stay with the tried and true 39-year straight-line depreciation.
Nevertheless, the doctors were determined. They reached out to Burns Funding and its Cost Segregation partner. Together,we have been working together for more than a decade on Cost Segregation projects.
A study was commissioned. It was determined that roughly $1.6 million could be placed on a 5-year depreciation schedule, while another $500,000 could be placed on a 15-year depreciation schedule. Given the laws that were in place at the time — a 50 percent bonus depreciation – the doctors were able to enjoy a tax benefit of just north of $1 million. Given their bracket, the net tax benefit was more than $500,000.
The amazing thing is that had the project been completed a year later, their savings would have been double that number as a new law was passed in 2018 allowing for a 100 percent bonus depreciation.
Cost Segregation is perhaps the most underutilized law in the tax code. It flies well under the radar of most property owners, primarily because accountants and CPA firms are risk averse when it comes to such measures.
Meanwhile, the benefits to the property owner are extraordinary, since they are able to minimize their taxes, while increasing their cash flow. The law is doing exactly what is it is supposed to do when it was passed – encourage growth in the commercial real estate market by creating a massive financial incentive. No one needs to remind the aforementioned doctors of its value, who today enjoy a thriving practice.