Cost Segregation in Syndication

[Todd Dexheimer]

To the companies that are syndicating and LP investors: What are your thoughts on cost segregation studies? 

1. Do they save your investors money over the life of the hold?

2. If your investors are W2 emloyees, how do you feel it effects them in a positive way and negative way? 

3. At the time of sale, what are the downsides that you see and the upsides vs. traditional depreciation? 

[Paul Caputo]

@Todd Dexheimer

I'm not a syndicator, but I am a cost segregation expert. 

1. Cost seg should absolutely save money over the hold period. Taxes are decreased significantly which increases cash flow significantly. Without cost seg these tax benefits are often never realized due to short life assets being improperly classified as long life assets. An added benefit is the lower amount of long life real property assets means a smaller property tax bill in most jurisdictions.

2. There are passive loss limitation rules that can affect such investors if their active income is over $100k, unless the qualify as a real estate professionals for tax purposes. If an investor does not qualify as a real estate professional and makes over $150k in W2 income any passive losses are carried forward, so they'd pay no tax on the investment income and have a carry forward to be used in future years as long as the depreciation is sufficient to wipe out investment income. If under $100k active income there's a $25,000 limit on passive losses. That limit phases out from $100k-$150k at a 2:1 ratio. Paper losses from depreciation can also be used to offset other passive income.

3. The downside at sale is depreciation recapture, but profit and capital return at sale will more than cover any recapture in the majority of cases. Recapture will be higher with cost segregation than traditional depreciation, but there will be some level of recapture either way. Partial asset dispositions can significantly mitigate recapture since there's no recapture for retired assets, and if a 1031 exchange is used to exit capital gains and recapture are further deferred until sale without a 1031 exchange. 

Hope that helps! For the vast majority of commercial properties cost segregation is a home run that provides significant benefits to all investor partners.