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COLORADO REAL ESTATE JOURNAL
— March 16-April 5, 2016
Law & Accounting
J
ust because the calendar
has flipped to 2016 doesn’t
mean that all opportunities
to plan and minimize taxes from
2015 are gone.
If you or your business bought,
sold or held real property in 2015,
and you have yet to file your tax
returns, there is still time for valu-
able strategies and planning that
could save material dollars when
the returns are actually filed and
tax is due. The Colorado market
has been active, values are up and
transactions are plentiful – a per-
fect storm for planning opportuni-
ties, even in hindsight. These strat-
egies and considerations are just a
few that might provide value as
we work our way through anoth-
er round of tax returns this filing
season.
If you bought, or held, property
in your business or for investment
as a rental (commercial or residen-
tial), there is a good chance that
cost segregation could maximize
deductions that can offset taxable
income. The tax code generally
requires commercial real estate to
be depreciated over a very long
life – 39 years for commercial and
27.5 years for residential (single-
and multifamily). A cost-segrega-
tion study allows the owner of the
property (individuals, businesses
and investment entities), to “carve
out” components of the building
that can be depreciated overmuch
shorter periods of time. In addi-
tion, if the building was new in
2015, the segregated cost that is
placed in the shorter-lived catego-
ries could be eligible for “bonus
depreciation,” which allows you
to write off 50 percent of those
costs off the top and the other
50 percent over five, seven or 15
years, depending on the type of
property.
These deductions are oftentimes
overlooked or even discounted as
just a “timing issue.” On prop-
erty with large costs, these deduc-
tions can be extremely valuable to
owners and developers as a way
to raise or retain capital through
tax efficiencies. Even if the prop-
erty was purchased decades in
the past, a cost-segregation study
is still available. By doing one, an
owner can recalculate the cumula-
tive deductions that could have
been taken, compared to what
they actually took using just the
39 or 27.5 life, and deduct the
delta in 2015 by filing a Form 3115
“Change in Accounting Method.”
Most
CPA
firms, as well
as reputable
specialty tax
firms
that
offer
cost-
segregation
services, will
provide esti-
mates of those
benefits with-
out charge or
commitment.
If you own
depreciable
real
estate,
whether it was purchased in 2015
or prior, itmay beworth exploring
what additional deductions you
could be taking advantage of.
If you purchased or sold depre-
ciable real estate in 2015, alloca-
tion of basis is another often-over-
lookedexercisethatcanbeaneffec-
tive, and subjective, way to mini-
mize taxes. The tax code generally
requires an “equitable” allocation
of costs upon the purchase or sale
of real estate. If you purchased
a building in 2015, for example,
likely there will be an allocation
of purchase price between land
and building. Minimizing the
allocation to land, which is non-
depreciable for tax purposes, can
allow for larger depreciation on
the building and its components.
A larger, and proper, allocation
to the building in turn drives
more depreciation deductions on
the return. These allocations are
subjective and may be different
based on a buyer’s determina-
tion of reasonable value between
the two. Selling depreciable real
estate may also require an alloca-
tion between those components,
which may result in more, or less,
tax basedon the approachused. In
contrast to buying an active busi-
ness where the buyer and seller
generally and contractually agree,
and disclose the consistency on
their tax returns, on the purchase
price allocations including the
business goodwill and intangibles,
with most real estate transactions,
there is only a single settlement or
closing statement that agrees on
the total price of the property. A
buyer and seller may have differ-
ent allocationswith regard to land,
building, personal property, etc.,
and they can both be correct even
though they differ.
If you are a land developer who
subdivided a parcel of property
and sold lots during the year, con-
sideration would also need to be
given to how to allocate land costs
to the developed lots. This may
be based on acreage, relative val-
ues of the completed lots, front-
age foot, etc. Again, a reasonable
and equitable allocation should
be made, which opens the door
to subjectivity and opportunity
within that range. Elections also
can be made to accelerate com-
mon-area costs that are able to be
estimated and yet to be completed
on the project as well. Especially
if you are a dealer, i.e., subject to
ordinary income rates on the sale
of lots, minimizing taxes on sales
now will enable more capital to
be available for the project as a
finance mechanism. If you have
not yet started physical construc-
tion or development on the prop-
erty, or otherwise crossed the line
into “dealer” territory, prospective
strategies may exist to take advan-
tage of capital gains inherent in the
property.
Nearly every type of real estate
transaction provides opportunity
when it comes to income taxes.
Effective tax planning can be a
major driver of value to your
real estate investment. Failure to
engage a real estate-specialized
team of tax professionals (CPAs
or attorneys) based on cost of
services, not knowing better or
whatever the scenario can lead
to missed opportunities, lower
after-tax returns and, ultimately,
less money to invest in the next
project.
s
Scott P. Grimm,
CPA
Tax partner, Anton
Collins Mitchell LLP,
Denver
If you own
depreciable real
estate, whether
it was purchased
in 2015 or prior,
it may be worth
exploring what
additional
deductions you
could be taking
advantage of.
