|
Tenants
|
 
|
Although cost segregation is most commonly thought of as a strategy used by building owners, it can also be a great tool for tenants. If you’ve paid for improvements to your space and pay taxes you can probably benefit from a cost segregation study; assuming the benefits from the study are enough to justify the fee for the analysis.
Cost segregation generally starts to make sense for tenants when the depreciable cost basis of the improvements approaches the $250,000 range which is quite low in comparison to the $1 million plus range for buildings. This is primarily due to the fact that a study performed for a tenant is focusing on a specific area and does not include the base building elements which make up the majority of the non-qualifying (39-year) costs. Therefore, the percentage of costs allocated to a shorter recovery period (typically 5-year) is proportionately higher than in a study performed on an entire building.
The amount of costs that qualify for a shorter recovery period will also be driven by the type of finish and the specific business being conducted in the space. The best candidates for cost segregation when it comes to leased space include…
• Medical Suites
• Dental Practices
• Law Firms
• Retailers
• Restaurants
Qualified Leasehold Improvements (expires 12/31/07)
In addition to the usual benefits associated with a cost segregation study of a leased space, there are some temporary rulings which may allow for even greater benefit. The Tax Relief and Health Care Act of 2006 retroactively extended the deadline for Qualified Leasehold Improvements (QLI) and Qualified Restaurant Improvements (QRI) to December 31, 2007. The extension allows “qualifying” improvements to be depreciated over 15-years using a straight line method instead of the usual 39-year recovery period. A cost segregation study will properly identify improvements that qualify for this special treatment as well as those that can be depreciated even faster, over 5-years.
• The improvement is made under, or pursuant to, a lease by the lessee (or any sublessee) or the lessor of that part of the building.
• That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.
• The improvement is placed in service more than 3 years after the date the building was first placed in service.
However, a QLI does not include any improvement for which the expenditure is attributable to any of the following.
• The enlargement of the building.
• Any elevator or escalator.
• Any structural component benefiting a common area.
• The internal structural framework of the building.