18 OPPORTUNITY ZONE MAGAZINE | ISSUE 2 • VOLUME 2
Category
Building 39 Years No $ 10,000,000 $ 1,000,000
Qualified Improvement Property
Land Improvements Personal Property Land Total
Depreciable Life
15 Years
15 Years 5 Years
Bonus Depreciation Eligible ?
Yes
Yes Yes
No Cost Segregation Study
0
0 0 2,000,000 2,000,000
Cost Segregation Study
7,000,000
500,000 1,500,000 2,500,000 4,000,000
Maximizing the benefit of the cost segregation study requires proactive planning with your tax advisor .
Also , assume the following tax rates applicable to depreciation deductions from the project :
Federal income tax 37.0 % and whether the building is residential rental property vs . nonresidential real property .
Net investment income tax State and local income tax Total
3.8 % 5.0 %
Finally , assume that the project is sold at the end of the 10th year following completion of the rehabilitation . Following is a summary of the benefits of the cost segregation study based upon the above assumptions :
With Opportunity Zones Tax Benefits
Cost Segregation Study
No Cost Segregation Study
45.8
Without Opportunity Zones Tax Benefits
Cost Segregation Study
No Cost Segregation Study
TAX PLANNING CONSIDERATIONS
As illustrated above , a cost segregation study can significantly enhance the after-tax IRR of an investment in a QOF . However , maximizing the benefit of the cost segregation study requires proactive planning with your tax advisor and special attention to numerous technical nuances , including the following :
• Tax basis : To maximize the benefits of cost segregation , it is important to structure the transaction so that the QOF investors will have sufficient tax basis to benefit from the accelerated deductions . QOF investors do not immediately receive tax basis for their capital contributions .
Accumulated Depreciation |
$ 9,270,299 |
$ 2,702,991 |
$ 9,270,299 |
$ 2,702,991 |
x Tax Rate |
45.8 % |
45.8 % |
45.8 % |
45.8 % |
Tax Benefit of Depreciation ( A ) |
$ 4,245,797 |
$ 1,237,970 |
$ 4,245,797 |
$ 1,237,970 |
Depreciation Recapture Upon Sale |
$ 0 |
$ 0 |
$ 9,270,299 |
$ 2,702,991 |
x Tax Rate ( Blended ) |
N / A |
N / A |
36.1 % |
33.8 % |
Tax on Depreciation Recapture ( B ) |
$ 0 |
$ 0 |
$ 3,348,861 |
$ 913,611 |
Net Permanent Tax Benefit ( A-B ) |
$ 4,245,797 |
$ 1,237,970 |
$ 1,237,970 |
$ 324,359 |
Based upon the assumptions outlined above , a cost segregation study generates $ 6,567,308 of additional depreciation deductions over the holding period of the property , which are not required to be recaptured upon sale of the property assuming the investors qualify for opportunity zone tax benefits and the sale occurs more than 10 years after their investment into the QOF . Such additional deductions result in permanent tax savings of $ 3,007,827 . Please note that the above example ignores the time value of money associated with the additional depreciation deductions . Consequently , the value of a cost segregation study is greater than illustrated above .
It is important to note that the tax benefits of a cost segregation study for any particular project will depend upon the facts and circumstances , including factors such as the nature of the physical improvements made to the building , whether the project is new construction vs . rehabilitation ,
OPPORTUNITYZONE . COM