As part of the “Tax Cuts and Jobs Act”, the Senate is proposing shortening the depreciation of real property to 25-years. A shortening of the real property tax life from 27.5-years for commercial residential real estate and 39-years commercial non-residential real estate will have a positive effect on tax savings to owners and investors of U.S. owned commercial property. Increased tax savings will allow for reinvestment in personal property, real property, intangible property and human capital.
As presented in Table 1 (see PDF), a decrease from 27.5 and 39-year to 25-year straight-line depreciation, will increase net present value tax savings by $9,960 for every $1 million spent when 27.5-year property is reclassified to 25-years and $42,847 when 39-year property is reclassified to 25-years.
Under the Senate’s proposed tax bill, U.S. tax payers will receive even greater tax savings from applying accelerated depreciation of building components through a cost segregation study.
By analyzing the commercial building components of sample properties, we can identify building components that are considered personal property, support personal property, and site improvements eligible for reclassification as 5, 7 and 15-year property, respectively. Typically, 10% to 30% of a property’s value is eligible for reclassification.
Table 2 (see PDF) presents the additional tax savings benefit of conducting a cost segregation study for a $10 million investment by property type under the current 27.5 and 39-year depreciation periods compared to the proposed 25-year recovery period.
In conclusion, if the proposed 25-year recovery period makes its way into law, potential tax savings resulting from a cost segregation study could provide an additional $100,000 to $400,000 of tax savings on a $10 million property.