Madison Commercial Real Estate Services (MCRES) of Lakewood, N.J., has developed a comprehensive continuing education series of complimentary CPE-eligible cost segregation and 1031 exchange presentations to help CPAs, property owners and managers, builders, and end-users understand and implement these residential and commercial real estate strategies.
Cost segregation increases cash flow
An Internal Revenue Service-approved process, cost segregation reclassifies real estate components and improvements to effectively accelerate depreciation deductions, defer taxes and improve cash flow.
"Despite being an invaluable tool in any economic cycle, cost segregation remains underutilized due to its relative anonymity and complexity," said Eli S. Loebenberg, chief executive officer of MCRES affiliate Madison SPECS, LLC, who serves as the program's lead instructor and moderator.
"Because this service has such important potential, MCRES has developed a curriculum that helps businesses and industry professionals identify when a cost segregation study will yield value, gain an understanding of the process and enhance their overall knowledge of this relevant accounting practice," Loebenberg said.
According to the IRS code, buildings can be depreciated over a 27.5- or 39-year period. However, certain categories of fixed assets, whether it be an existing property or new construction, can be depreciated over five-, seven- or 15-year periods, resulting in significant tax credits. Property types include, but are not limited to, office, industrial, retail, multi-family, and senior housing. Some areas identified and considered part of a cost segregation study are non-structural equipment, playgrounds, tennis courts, parking lots, landscaping, signage, interior and exterior lighting, and carpeting.
Case in point
One example of MCRES's results-driven studies is completion of an engineering and tax assessment within a three-week timeframe of one of the largest mixed-use corporate office parks in the nation. Employing and dispatching an in-house team of accountants and engineers, MCRES identified the assets throughout the 500-acre park that were eligible for accelerated tax depreciation and then accurately determined their overall value. The 14-buildings, totaling approximately 4 million square feet, included office, industrial, research, distribution, and manufacturing space.
The result: reclassification of 13 percent of the facility's total cost from a 39-year to a 5-year Modified Accelerated Cost Recovery System (MACRS); 6 percent was reclassified to a 15-year MACRS property; and a net tax benefit of $201,260 in the first year was achieved, followed by a net tax benefit over the first six years that exceeded $2.26 million.
"Regardless of the vast amount of information and tight schedule of this project, it was a seamless process," said Loebenberg. "We were able to service this client with the same speed, accuracy, and thoroughness that we do every client, regardless of the property's use or size. For each $1 million of reclassified assets, MCRES averages approximately $150,000 to 200,000 of tax savings."
1031 allows RE investors to defer capital gains taxes
Also an IRS-approved process, the 1031 exchange allows commercial real estate investors to defer capital gains taxes by exchanging one property for another like-kind property. Safe-harbor rules bar property owners from immediately accessing funds generated by the sale of a property - a third-party intermediary is required to hold all proceeds until a replacement property is found.
"The rules are complicated, and they keep changing," said David Medinets, Esq., senior counsel, Madison Exchange LLC. "A 1031 exchange requires considerable expertise, but when successfully completed, it is a valuable tool that can provide substantial benefits for preserving equity and improving cash flow. For that reason, MCRES has developed a curriculum that covers the entire process."
Case in point
As one example of how investors can benefit from a 1031 exchange, a client had originally purchased a parcel of vacant land in suburban New Jersey for $30,000 and sold it 10 years later for $315,000. By utilizing a 1031 exchange, the owner was able to utilize 100 percent of the equity in their property ($315,000) combined with a bank loan of $105,000 to purchase a 24-unit apartment building in Pennsylvania for $830,000.
The client was able to defer payment of the federal capital gains tax of 15 percent and the state capital gains tax of 7 percent - totaling nearly $70,000 - as well leveraging the equity from the original investment toward the acquisition of an income-producing multi-family property. Rents generated by the newly acquired building netted $6,500 of income monthly for the owner after debt service.
Each of MCRES's in-depth cost segregation and 1031 exchange education seminars can be customized to accommodate the host firm's unique goals and objectives. Formats include general sessions, workshops or panel presentations, ranging from 60 to 120 minutes. Topics address cost segregation and 1031 exchanges as important strategies for owners of investment and business real estate properties, how they work, and the qualities of reputable experts on both subjects.
Loebenberg, who partnered with MCRES to form Madison SPECS in 2006, is a sought-after guest speaker and an acknowledged industry leader and educator. A member of the American Institute of Certified Public Accountants, he frequently hosts conference calls, Webinars, in-person seminars, video conferences and serves as a guest panelist at financial and real estate industry events.
Medinets, a noted lecturer and author on the subject of §1031 exchanges, is also a Certified Exchange Specialist and active member of several Federation of Exchange Accommodators (FEA) committees, including the CES Council and Tax Advisory Board. He also frequently teaches seminars and webinars for the real estate industry.
For more information about MCRES's free educational seminars, or to arrange a program, visit the Web site or call (848) 525-8200.