Split Up Self Storage Facility Purchase: Business vs Real Estate

[Weina Shi]

Dear fellow investors,

I am under contract to purchase a facility. The current assessment is about half of the purchase price so the real estate tax will go significant up. My attorney recommended that I consider splitting up biz value vs real estate value. Tax assessment will only be on the real estate value so the real estate value will be more manageable. Has anyone done this?

It add a little more complexity as it will be two transactions (to finance instead of one). Is it worth the extra effort considering real estate tax savings, depreciation, loan?

Thanks!

[Weina Shi]

Here is my analysis, which assumes the business portion is not eligible for 1031. This also ignore time value of money to make the math simple. Also assumes lender will finance both the business value and real estate.

Based on this analysis, overall it seems that both options have similar financial impact but the real estate tax saving will make splitting the transaction into business vs real estate superior.

Option one: Purchase as one transaction (not splitting up business vs real estate)
Real Estate Value	$ 4,000,000
Land	$ 500,000
Improvements	$ 3,500,000
Depreciation	$ 89,744
Depreciation yrs	39
Total Depr in 10 years	$ 897,436
Total annual D&A	$ 89,744
Total 10 year D&A	$ 897,436
Tax Rate	42%
Annual tax saving	$ 37,692
Total 10 year tax saving	$ 376,923

Option two: split up business value vs real estate value
Real Estate Value	$ 3,000,000
Land	$ 500,000
Improvements	$ 2,500,000
Depreciation	$ 64,103
Depreciation yrs	39
Total Depr in 10 years	$ 641,026
Business Value (Good will)	$ 1,000,000
Amortization (15 year schedule)	$ 66,667
Total Amortz in 10 years	$ 666,667
Total annual D&A	$ 130,769
Total 10 year D&A	$ 1,307,692
Income Tax Rate	42%
Annual tax saving	$ 54,923
Total 10 year tax saving	$ 549,231
Depreciation recapture for good will upon a sale (assume 1031 exchange all real estate)
Total recap	$ 666,667
Tax at 25%	$ 166,666.67
Tax saving net of amortization recapture	$ 382,564.10