Tax Planning Strategies for Self-Storage

[Julio Gonzalez]

There has been an increasing demand in recent years for self-storage units to store business items and personal belongings. This demand has attracted real estate investors as it can be a stable and lucrative sector of real estate. It’s important for these investors to be aware of the tax-savings strategies available to self-storage facilities. One of the most beneficial tax strategies is a cost segregation study. It can create significant tax savings increasing the financial performance of the property.

Why does cost segregation make sense for self-storage?

Self-storage units qualify as “tangible personal property” under the U.S. tax code as they are not permanently attached to the land and thus considered moveable. This means that instead of being depreciated over 39 years as most commercial property is, the storage units can be depreciated in just 7 years which results in very significant tax savings.

There are some cases in which the storage units don’t qualify to be depreciated in 7 years, however there are typically other components that qualify for the accelerated depreciation. Interior partitions and HVAC systems could qualify for a 5 year useful life. This also results in substantial tax savings when depreciated over 5 years rather than 39 years.

What are the benefits of a cost segregation study?

By reclassifying assets in different categories with shorter recovery periods, you are able to significantly accelerate depreciation. Doing this reduces your current tax liability which provides more cash flow available for reinvestment or other financial requirements such as paying down debt.

What self-storage facility assets qualify for cost segregation?

• Personal property - including fixtures, equipment and machinery that is used in the self-storage facility operations that can typically be depreciated over 5 years.
• Site improvements- including parking lots, landscaping, and fences that are depreciated over 15 years.
• Buildings and improvements - the primary self-storage structure including all attached improvements such as additional storage spaces or office spaces
• Non-qualifying assets - including land and intangible assets

What are some examples of these assets?

• Climate control systems
• Interior and exterior lights
• Signage
• Security and access control systems
• Office and maintenance equipment
• Paved surfaces and walkways
• Elevators and material handling equipment
• Shelving and storage systems

If you have a self-storage property, have you utilized a cost segregation study? If not, are you considering one? What questions do you have?