Cost segregation studies have become a popular way for commercial property owners and qualifying leaseholders to realize immediate tax savings. Whether it’s new construction, improvements or the owner has recently acquired the property, a cost segregation study can result in compelling savings. In fact, the tax benefits of this approach are well documented and many have already taken advantage of it. However, while there are benefits, it’s important to be aware of and plan for the recapture tax when conducting a study. The recapture tax requires the building owner (usually the taxpayer) to repay accelerated deductions (including from a cost segregation study) when the property is sold. Because the tax is assessed only when the property is sold, it’s important for property owners to carefully plan when they intend to sell and conduct tax planning appropriately. To help clients, prospects and others understand the tax and how to plan for it, Wilson Lewis has provided a brief summary below.
The recapture tax is an income tax on a gain realized when a taxpayer disposes of an asset (sells a building, for example) that previously received an offset of income through depreciation. The tax was created to close a tax loophole that many were leveraging to keep capital gains taxes low. Taking the accelerated deprecation usually allows a building owner to take deductions against ordinary income in the current year, which is a great feature of cost segregation. However, it also creates a situation that results in a lower capital gains tax when the building is sold, thus providing an additional benefit to the property owner. As a result, the tax was enacted to ensure that gains resulting from depreciation were correctly taxed.
For those who are considering or have already conducted a cost segregation study and have plans to sell the property at some point, the following tax planning strategies can be utilized to offset the increased tax liability:
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Concern about the recapture tax should not prevent a property owner from taking advantage of cost segregation studies. However, there should be a comprehensive tax plan in place to address the recapture tax once the building is sold. If you are considering selling your building or if you would like tax planning assistance, Wilson Lewis is ready to help. For additional information, please call us at 770-476-1004, or click here to contact us.
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