Combining The Grouping Of Multiple Properties And Cost Segregation To Maximize Your Tax Benefits

By Author: Engineered Tax Services
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Property owners with multiple properties that would generally be considered a passive investment, can group their assets, turning a passive investment into an active investment. This allows the passing through of depreciation and other deductions directly to the property owner.

How do you group your properties?

Under Reg. Section 1.469-4(c) if the business and rental properties can be considered an economic unit then the income and losses can be combined and considered active.

The IRS is kind enough to summarize this for you;

If related businesses form an appropriate economic unit, entities may be grouped as a single activity, making it easier to meet the 500-hour test. The taxpayer needs to show he materially participates in the grouped activity as a whole. A sole proprietorship (Schedule C or F), C or S Corporation, partnership or LLC may be grouped into one single activity if the businesses form an appropriate economic unit. See Reg. § 1.469-4.

An “activity” is not constrained by entity lines. If the taxpayer spends 500 hours among the grouped businesses, even though in different ...
... entities, he materially participates in all. The entire 500+ hours could be spent all in one business entity or could be spread among several related entities.

It is important to note that Reg. § 1.469-4(a) only provides for grouping of businesses (or rentals). Businesses generally may not be grouped with rentals. Land or buildings held for investment may not be grouped. And, of course, no personal activity or portfolio activity belongs in the grouping.

It is possible that several different activities may exist within a single entity. Example: two unrelated businesses or a business and a rental activity within a single partnership.

http://www.irs.gov/irb/2008-31_IRB/ar11.html

So this is a mouth full, what is means in non-accounting English is that the losses related to a property may be passed through to the owner of the property, and that individually owned properties may be brought together as if they were one group. You need to discuss this with your tax professional prior to embarking on a grouping; these are specific rules and guidelines that must be followed.

Grouping turns a passive tax investment into an active tax investment, meaning that any losses or excess depreciation may be passed through to the owners of the property.

So how do you find additional depreciation and deductions that you can have passed through to you?

Cost Segregation and EPAct

A cost segregation study is a federal income tax tool that increases your near term cash flow, in the form of a deferral, by utilizing shorter recovery periods to accelerate the return on capital from your investment in property. Whether newly constructed, purchased or renovated, the components of your building may be properly classified, through a cost segregation study, into shorter recovery periods for computing depreciation deductions. The study carves out, into 5, 7 and 15 year lives, certain qualifying portions of your building that are normally buried in 39 or 27½ year categories.

Case Example:

A three million dollar office building will provide significant passed through benefits to the property owner(s).

The benefit of accumulated benefits (over five years) is $162,000, all of which can be passed through to the owners of the property.

EPAct Tax Deductions, these deductions ranges between $.60/ft2 and $1.80/ft2. We have provided thousands of the highest quality energy tax certifications since 2005. Handling over 400 certifications every month, we have perfected the process by working closely with the IRS on a regular basis. Our LEED AP designation strengthens and adds depth to the ETS experience and qualifications under EPACT while supporting energy efficiencies under LEED. We offer a measurable dynamic to increase your return on investment and improve efficiencies – all with the goal of reducing operating expenses and obtaining additional tax deductions or credits.

Case Examples:

A 100,000 square foot office building that is retrofit with a new lighting and HVAC will generate $120,000 in tax deductions for the property owner. You gain tax deduction for upgrading your property, in addition these tax deductions are passed through to the owners of the property and are not subject to AMT. (Alternative Minimum Tax.)

Summary:

A property owner can convert their passive investments into active investments, and pass through deprecation and deduction to the property owners. The property owners can use Cost Segregation and EPAct tax deduction to benefit themselves by passing through these deduction and benefits.

If you have a question about this article or would like to discuss your Cost Segregation options, please contact the Author, Don McDougall.

Don McDougall is a Director with Engineered Tax Services, a firm specializing in capturing tax incentives available through EPAct 2005. Don can be reached on PH:213.280.2266 or email: dmcdougall@engineeredtaxservices.com