Capstan CostSeg201

Cost Segregation 201:
Current Commercial Real Estate Depreciation Strategies

DISCLAIMER
This information is based on Capstan's understanding of the subject matter; the

content should not be construed as situation-specific tax or legal advice and no
options should be implemented without the validation and approval of your tax
advisor or CPA. As such, the recipient agrees to hold Capstan harmless with
respect to any actual or consequential damages incurred by direct or indirect
utilization of information or strategies contained herein.
ABOUT US
Capstan Tax Strategies is a professional services firm that helps
CPAs and their commercial real estate clients to navigate Tangible
Property and Fixed Asset Regulations. With our collaborative and
consultative approach, we assist your team with the “heavy lifting” of
detailed, engineering-driven solutions required to maximize tax
efficiencies.
• Team has over 100 cumulative years of experience

• Team has completed over 8,000 successful studies
• Commitment to best practices in the industry
-- Full compliance with ASCSP MQS 2016
-- IRS ATG
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CAPSTAN
Wilmington, NC Wilmington, NC
Los Angeles, CA
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(coming soon)
Houston, TX
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Today’s Presenter
Isaac Downing
Regional Director
idowning@capstantax.com
(o) 215.885.7510
(c) 805.341.0142
6
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Agenda
▪ Bonus Depreciation for Acquisitions and Construction
▪ History of Qualified Property Categories and QIP
▪ The CARES Act and Related Rev. Procs.
▪ Section 179 Expensing
▪ Energy Incentives
▪ The Tangible Property Regulations
▪ 1031 Exchanges
▪ Strategic Hierarchy

Life Cycle of Real Estate
Cost Segregation Supports Tax Strategies at Every Stage
GOALS Renovation/Additions
Tenant Improvements
Accelerate Depreciation Leasehold
Improvements
Maximize Bonus Depreciation
Expense vs. Capitalization New Construction
Decisions Acquisition Redevelopment/
Acquisition/Renovation Reposition
Maintain Accurate Record of
Fixed Assets for TPR
Compliance
Dispositions Lookback Studies of Existing
Assets
(Adjustments Made in Current Year)
Conceptual Design
and Project Planning
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Life Cycle of NEW CONSTRUCTION ACQUISITION
Real Estate • Cost segregation is a tax planning strategy in which assets

are reclassified into shorter depreciation periods, resulting
• Accelerated depreciation has always been a key tax strategy for
acquired properties.
in accelerated deductions and increased cash flow. This • Now bonus depreciation is also in play for acquisitions placed-in-
does not create new deductions, but shifts their timing, service on or after 9/28/2017 – a huge benefit.
allowing taxpayers to claim deductions sooner and benefit • Acquisitions should now automatically trigger the thought of a
CONCEPTUAL DESIGN & PROJECT PLANNING
from the time value of money. cost segregation study (CSS) – especially while the bonus
• Bonus depreciation is an additional incentive permitting the depreciation rate is 100% through the end of 2022. It will then
• Even before construction begins, the thoughtful immediate write-off of the full purchase price of eligible step down 20% a year through the end of 2026.
developer can tee up for tax savings. assets. A Cost Segregation Study (CSS) is the primary • The CSS allows real estate owners to not only accelerate
• Select materials eligible for rapid depreciation when vehicle used to determine and document bonus eligibility. depreciable assets, but dramatically increase the speed of these
possible – 5-year resilient flooring vs. long-lived 39- • Performing a CSS as soon as possible allows you to deductions through bonus depreciation.
year ceramic flooring, for example. maximize tax savings from Day 1.
• Consider incorporating energy-efficient • Plus, the included Unit of Property study will lay the
improvements in lighting, HVAC, or building groundwork for future tax savings opportunities, especially
envelope -- depreciation deductions of up to if future capital expenditures are on the horizon.
$1.80/improved square foot are possible.
REDEVELOPMENT/REPOSITION/SALE/EXIT STRATEGY
• Developers who have a strategic vision for their property long-

RENOVATIONS/ADDITIONS/TENANT IMPROVEMENTS term can build Cost Segregation into the project to significantly
LOOK-BACK STUDIES increase long-term benefit.
• If the developer plans to demolish the property, it’s important to
• Some improvements may be immediately expensed under
have documented the personal property so that you can write off
• If a CSS was not performed immediately after a the Tangible Property Regulations. The CSS provides the
those assets.
property was placed-in-service, the taxpayer can required documentation to justify expensing vs.
• If there is a major redevelopment, PAD Elections and QIP can
still “catch up” on all the depreciation he would capitalization decisions.
bring tremendous additional savings. Having the cost segregation
have accrued. • If an asset is retired, the remaining depreciable basis of that
study done early on documents what was there from the start
• The IRS permits “look-back” studies that yield the asset may be written off in the year the asset was removed
and allows for creative additional tax savings on the back end.
same tax savings as if the study had been through Partial Asset Disposition (PAD Election).
performed on Day 1. • Data generated in a post-renovation study may be used to
• Any commercial property placed-in-service after create a disposition table documenting all assets that have
1/1/87 is eligible to be the subject of a “look-back” been removed and supporting the associated immediate
study, though best results are achieved for write offs. This is generally employed in combination with a
properties in service less than 15 years. CSS performed before renovations.

The Capstan Strategy Matrix
Accelerated Depreciation
and Bonus
Tangible Property Section 179

Regulations Expensing
Energy Incentives
A thoughtful and comprehensive tax plan will
include the interplay of multiple strategies
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Bonus Depreciation
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Bonus is an Important Part of a Comprehensive Tax Strategy
100% Bonus under the TCJA Accelerated Depreciation

and Bonus

Energy Incentives
A thoughtful and comprehensive tax plan will
include the interplay of multiple strategies
Bonus Depreciation Under the TCJA
The BIG Three Changes Are:

1. 10 Years of Predictable Rates through 2026
2. 100% Bonus in play through 2022
-- Potentially for assets Q4 of 2017
3. Acquired Assets Can Now Leverage Bonus

Bonus Depreciation Under the TCJA – Crucial Date
▪ TCJA Establishes a Mid-Year Bonus Rate Split

– 9/27/2017 is the crucial day that will determine bonus rates
▪ On August 8, 2018, the IRS issued proposed regulations
confirming that the rules set out in Reg. 1.168(k)-1(b)(5) will
be retained.
▪ New Final Regs were released on Sep 13, 2019, along with
New Proposed Regs

Polling Question #1

Bonus: Acquisitions
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Bonus Under the TCJA -- Written Binding Contract
▪ TCJA Bonus eligibility in 2017 is contingent on a Written Binding Contract signed after
9/27/17
– If a written binding contract for the acquisition of property is in effect prior to September 28, 2017,
the property is not considered acquired after the date the contract is entered into (Act Sec.
13201(h)(1) of the 2017 Tax Cuts Act).
– NOTE: a contract is binding only if it is enforceable under STATE law

Bonus Under the TCJA – Acquisitions of Real Estate
DRIVEN BY DATE OF WRITTEN BINDING CONTRACT (WBC)
WBC for Purchase of Property WBC for Purchase of Property

Signed BEFORE 9/28/17 Signed ON or AFTER 9/28/17
• Considered to have been acquired • Acquired under TCJA, therefore
BEFORE TCJA comes into play TCJA Bonus rules apply
• Therefore, PATH Act Rules must • 100% Bonus
apply and acquired assets would (Remember that assets must have MACRS class lives of
20-years or less)
NOT be eligible for Bonus

Case Study -- TCJA Impacts Results
▪ Medical Office Building acquired and placed-in-service in March 2018 (before IRS issued
permanent guidance regarding WBC rules)
▪ Depreciable Basis: $4.1M
▪ 23.1% moved to 5-year
▪ 14.9% moved to 15-year
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Results Before TCJA – No Bonus on Acquisitions

Results After TCJA – 100% Bonus on Acquisitions

Case Study: Restaurant Fit-Out
▪ Acquired and placed-in-service in March 2020

▪ Depreciable basis: $3.8M
▪ Pre- CARES Act, engineers moved:
– 44.4% of assets to 5-year
– 1.1% of assets to 15-year
▪ Post-CARES Act, another 31.4% of assets moved into 15-
year QIP (with Bonus!)

Results Before CARES Act (QIP is 39-year, no bonus)

Results After CARES Act (QIP is 15-year, bonus-eligible)

Smaller Properties May Yield BIG Results Under TCJA
▪ Now that acquisitions are eligible for 100% Bonus, smaller-basis properties
are becoming good cost seg candidates
▪ Consider a single family rental home acquired 12/31/2017
– Total basis $180,937
– Engineers moved 18.5% to 5-year, 7.5% to 15-year
▪ Note impact of TCJA on additional first year cash flow

Pre-TCJA Post-TCJA
Additional First Year Cash Flow $8,721 $14,477
10-Year NPV $8,707 $10,076

Final Regs: Clarify WBC Effective Date
▪ Before the final regs, the WBC effective date was the actual
date it was signed
▪ The final regs now clarify that the EFFECTIVE date may be
significantly later than the ACTUAL date
▪ A strategic win for acquisitions

The acquisition date of property that the taxpayer acquired pursuant to a
written binding contract is the later of:
– The date on which the contract was entered into;
– The date on which the contract is enforceable under State law;
– If the contract has one or more cancellation periods, the date on which all
cancellation periods end; or
– If the contract has one or more contingency clauses, the date on which all
conditions subject to such clauses are satisfied
*For this purpose, a cancellation period is the number of days stated in the contract for any party to cancel the contract without
penalty, and a contingency clause is one that provides for a condition (or conditions) or action (or actions) that is within the
control of any party or a predecessor
▪ .

▪ Under final regs, the WBC effective date might be much later
than the actual date the WBC was signed
– Taxpayers who signed WBC pre-TCJA, but then dealt with cancellation
periods or contingency clause, might have an EFFECTIVE WBC date
that is post-TCJA
– Such projects might actually be eligible for bonus treatment
▪ Again, worth revisiting projects that may fall in this category

New Proposed Regs: What if There’s No WBC?
▪ What if the deal was sealed with a handshake and nothing else?
– As long as the property is not self-constructed, the acquisition date
should be considered the date on which the taxpayer paid or incurred
more than 10% of the total cost of the property
– Excluding preliminary activities like planning, designing, financing, etc.
▪ This is the same as the Safe Harbor we use to determine
“substantial construction”

Bonus: New Construction/Renovation
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Bonus Under the TCJA – New Construction/Renovation
▪ Driven by date “substantial construction” begun -- but how do we define “substantial”?

– No bright line definition in the code but…
– “In general, manufacture, construction, or production of property begins when physical
work of a significant nature begins. Physical work does not include preliminary activities
such as planning or designing, securing financing, exploring, or researching.”
– PLUS -- IRS Safe Harbor Option: Physical work of a significant nature will not be
considered to begin before the taxpayer incurs (in the case of an accrual basis taxpayer)
or pays (in the case of a cash basis taxpayer) more than 10 percent of the total cost of
the property.

Final Regs: Expand Self-Constructed Property
▪ Proposed Regs 8/8/2018 suggested that date of acquisition of third-party

construction projects should be determined by WBC
▪ Final regs state that property manufactured, constructed, or produced for the
taxpayer by another person under a written binding contract that is entered into
prior to the manufacture, construction, or production of the property for use by
the taxpayer in its trade or business or for its production of income is not
acquired pursuant to a written binding contract but is self-constructed property.
In short… no matter who did the construction,

date is determined by substantial construction date (not WBC)

▪ Another strategic win for taxpayers – a gift for construction projects

▪ Worth reviewing returns – may be able to amend 2017 and/or 2018 tax
returns to claim TCJA bonus depreciation
▪ Projects that were judged ineligible for bonus based on WBC date --
according to Proposed Regs 8/8/2018 -- might actually be eligible
using substantial construction date according to Final Regs 9/13/2019
▪ Need to revisit these projects

▪ Example: WBC date 7/2017, substantial construction 10/2017

– WBC date puts project in PATH-Act era
▪ According to Proposed Regs 8/8/2018, would have used WBC date and judged project
ineligible
– Substantial construction date puts project in TCJA era
▪ According to Final Regs 9/13/2019, should use substantial construction date – actually
is eligible for bonus

Bonus Depreciation Under the TCJA –
Final Thoughts
▪ Great time to reconsider cost segregation studies on

smaller, acquired properties
– Original use of property need not have commenced with the
current taxpayer
– Bonus boosted to 100%
▪ Bonus-eligible QIP is a game changer
▪ Be clear on relevant dates – consult with CPA/attorney as
needed
▪ Option to reconsider 163(j) election is available – 15-year
QIP may make you want to revoke your election-out

Polling Question #2

Qualified Property
Categories and QIP
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The Evolution of Qualified Property Categories
2001-2015 Path Act TCJA CARES Act
QLI QLI
QIP- QIP- QIP-

QRP QRP PATH TCJA CARES
Broad, easy-to- Long recovery period Short recovery

QRIP QRIP meet definition with period AND easy-
AND easy-to-meet
fewer restrictions definition with fewer to-meet definition
Short 15-year Short 15-year restrictions with fewer
recovery period recovery period restrictions

PATH ACT: Qualified Improvement Property
▪ Established by the PATH Act of 2015
▪ Broad Definition: any improvement to an interior portion of a building
which is nonresidential real property, as long as the improvement was
placed-in-service after the date the building was first placed-in-service
by any taxpayer.
– Exclusions:
▪ A building’s enlargement
▪ Elevator or escalator
▪ Internal structural framework of building

Coronavirus Aid, Relief, and Economic Security Act (CARES)
▪ $2 trillion stimulus
▪ Raises the limitation on deductible business interest from 30% to 50% of earnings before
interest, taxes, depreciation, amortization for 2019 and 2020.
– Rev. Proc. 2020-22 will further impact business interest limitation (we’ll discuss)
▪ Temporarily repeals the 80% income limitation for net operating loss deductions for years
beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is
allowed (taxpayers can elect to forgo the carryback).
▪ RETROACTIVELY corrects the recovery period of Qualified Improvement Property to 15-year
– we’ll discuss

CARES Act
QIP placed-in-service on or after 1/1/2018
Corrects will be treated as 15-year property under
the QIP “Glitch” the TCJA and as such is eligible for Bonus
Retroactively [remember, only property with a depreciable life

of 20-years or less is eligible for Bonus]

Currently Bonus-Eligible
39-Year
5 or 7-Year 15-Year 15-Year Land
27.5-Year
Tangible Personal QIP Land improvements Not Depreciable
Property (§1245) (§1250)
Real Property (§1250)
“Base Building” – roof, walls, windows,
foundations, vertical transportation, etc.

15-Year QIP Makes Many Taxpayers Revisit Past Returns:
In the Past, Many Elected Out of Section 163(j)
▪ Certain excepted businesses may choose to elect out of Section 163(j) and thereby bypass
the interest deduction limitation
▪ CAVEAT – generally have to depreciate property using longer-lived ADS system
– Residential Real Property: 30-year
– Non-Residential Real Property: 40-year
– Qualified Improvement Property: 20-year
▪ PLUS – these properties generally not eligible for bonus
▪ Back when QIP was 39-year MACRS life and not bonus eligible (pre-CARES QIP), it often
made sense to elect out and use ADS…

ADS vs. MACRS Decision Tree
Are Your 3-Year

Average Annual
Gross Receipts More
Than $26M?
NO YES
* Taxpayers making a
voluntary ADS election Limitation raised to 50% for
Are You Voluntarily* Interest Deduction 2019 and 2020, then will
may still be eligible for
Limitation of 50% return to 30% for 2021.
Bonus depreciation. Making an ADS
See IRC Sec. Applies.
168(k)(2)(D) Election?
NO
• An electing real property trade or
business is any real estate
development, redevelopment,
construction, reconstruction,
NO acquisition, conversion, rental,
operation, management, leasing, or
• Tangible property used Are You Electing Out brokerage trade or business.
predominantly outside of the United
States during the tax year;
YES of the Business • An electing farming business is any
trade or business involving the
• Tax-exempt use property; Interest Limitation? cultivation of land or the raising or
• Tax-exempt bond-financed property;
• Property imported from a foreign [Subject to Eligibility] harvesting of any agricultural or
country for which an Executive Order
Do Any of the horticultural commodity. It also
includes a trade or business of
is in effect because the country Mandatory ADS operating a nursery or sod farm, or
maintains trade restrictions or
engages in other discriminatory acts
Descriptions Apply? the raising or harvesting of trees
bearing fruit, nuts, or other crops, or
(Code Sec. 168(g)(1))
ornamental trees
• Listed property with 50% or less
qualified business use
• Property used predominantly in a YES
farming business if it is placed-in-
service in a year an election not to
apply UNICAP rules to certain NO YES
farming costs
MACRS ADS
(Bonus) (No Bonus*)
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Version 1.0
Rev. Proc. 2020-22 Lets You Rethink Your Election to Opt-Out
▪ Now that QIP has a 15-year class life and is bonus-eligible, many taxpayers are regretting
their choice to elect out of Section 163(j) and depreciate using ADS
▪ Rev. Proc. 2020-22 permits taxpayers to REVOKE the choice they made to elect out back on
2018 or 2019 tax returns
– This allows them to take advantage of MACRS depreciation and bonus-eligible QIP
▪ Collateral actions are required
– Must determine if they are now subject to interest deduction limitation
– Must re-state depreciation method from ADS to MACRS and claim any associated bonus
– Must adjust returns for any items impacted by the change in taxable income

Rev. Proc. 2020-25: Clarifies HOW to Implement Retroactive Changes
▪ Taxpayers may want to:
– Retroactively change depreciation status of QIP under Section 168
– Create new late elections or revoke previously made elections in the following sections:
▪ Section 163(j) – interest deduction limitation (Rev. Proc. 2020-22)
▪ Section 168 (g) (7) – use of ADS
▪ Section 168 (k) – bonus depreciation Rev. Proc. also removes 5 year scope limit,
no longer need to wait 5 years between
▪ They can make these changes by:
filing two 3115s using same method
– File “Application for Change in Accounting Method,” Form 3115
– File an amended tax return, due on or before 10/15/2021
– In the case of a BBA Partnership, file an AAR (Administrative Adjustment Request) by 10/15/2021

Impact of QIP
▪ QIP being retroactively bonus-eligible has already

saved Capstan clients over $200M in tax deductions
– Will look at some real examples shortly
▪ QIP also brings other value to the table – it flags
assets potentially eligible for expensing under Section
179
▪ Which we’ll discuss next…

Section 179
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Section 179 Expensing
and Bonus

Energy Incentives
Section 179 Expensing Expanded Under the TCJA:
Non-Residential Real Property
▪ Effective 1/1/2018, the TCJA expanded the eligible assets to include the following
improvements to non-residential building systems placed-in-service after the building was
placed-in-service:
– Qualified Improvement Property (QIP) or
– Roofs
– HVAC “Qualified Real Property”
– Fire protection and alarm systems
– Security systems
(Such improvements made to residential buildings are NOT eligible for 179 expensing)

Residential Property
▪ Effective 1/1/2018, TCJA permits expensing of section 1245 property purchased for use in
connection with a residential rental building under certain circumstances
▪ Property that is used predominantly to “furnish lodging” or “in connection with the
furnishing of lodging” QUALIFIES for Code Sec. 179 expensing
– Assets used to furnish lodging: beds and other furniture, refrigerators, ranges, and other equipment
– Assets used in connection with the furnishing of lodging: lobby furniture, office equipment, and laundry
and swimming pool equipment (doesn’t include things like gas, electric, sewer)
• In short, hospitality properties may potentially use 179 for furniture and
fixture type assets

Residential Property
▪ Caveat – assets used by a hotel, motel, inn, etc. are not considered used in
connection with the furnishing of lodging if more than half of the living quarters are
used to accommodate tenants on a transient basis (rental periods of 30 days or
less) and would not be eligible for Section 179 expensing (Code Sec. 50(b)(2)(B); Reg. §1.48-1(h)(1)(i) and (2)(ii))
▪ It seems multifamily residential property would be eligible, as less than half of the
living quarters are used on a transient basis
– However, business income limitation would kick in and preclude Section 179

Test to Determine if A Property Qualifies
▪ Is the property non-residential? (Don’t just ask, “Is it commercial?”)
▪ Does the activity fall into one of the newly defined TCJA categories?
▪ Is the taxpayer engaged in an active trade or business?
– Ideally, looking for material participation, but if there is an active trade/business it works for 179
– There is some gray here – no overarching court case has given bright-line guidance

Polling Question #3

Does This Property Qualify? Example 1
A return is being prepared for passive investors in a hospitality property. At question is 2021
renovations which include room refresh, new FFE and HVAC replacement.
▪ Is the property non-residential? Yes

▪ Does the activity fall into one of the newly defined TCJA categories? Yes
▪ Is the taxpayer engaged in an active trade or business? Yes
This 2021 work would rise to 179 eligibility, but due to the passive nature of the taxpayer’s
participation they will most likely not be able to use the benefit.

A return is being prepared for investor-operator in a duplex home property. At question are
renovations that include new kitchen, flooring and boilers for each unit.
▪ Is the property non-residential? No

This work would not rise to 179 eligibility, since the property is residential. The appliances
may be able to be taken under Section 179.

A return is being prepared for investor-operator in a mixed-use property. At question is
a fit-out for new office tenants.
▪ Is the property non-residential? Yes

This work would rise to 179 eligibility.

Section 179 Expensing Under the TCJA
▪ This is a “win” for tax savings
– The newly included improvements can be easily carved out during a cost segregation
study – adds even more value
– Limitation on the election is increased by almost 50%
– PLUS: for the first time, assets used in connection with the furnishing of lodging may
now be eligible for expensing under Section 179
▪ QIP tables in cost seg reports can now be used to flag Section 179-eligible
assets – QIP bringing a major new value

Additional Thoughts on Section 179
▪ Section 179 election must be taken in the year the work is placed-in-service
▪ A Section 179 election cannot place a taxpayer into a loss situation
▪ Section 179 vs. Depreciation?
– We have a tool for that coming up later in the presentation…

Energy Incentives
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Energy Incentives Are In Play Again
and Bonus

$
Reinstated Retroactively for Energy Incentives
2018 and Forward through 2020
Changes to EPAct 179D Deductions and 45L Tax Credits
▪ The Inflation Reduction Act of 2022 (IRA) was signed into law August 16, 2022,
extending and expanding energy incentives
▪ EPAct/179D: extended permanently by Consolidated Appropriations Act (CAA) (2021)
– Properties placed-in-service any time after 1/1/2006 are eligible for the deduction
– IRA makes major expansions to the deduction for projects placed-in-service after 12/31/22
▪ Section 45L: not made permanent by CAA
– IRA retroactively extended through 2022 with existing credit amount and qualification criteria
– IRA expands credit significantly for projects placed-in-service after 12/31/2022

EPAct/179D Legacy (2006-2022) EPAct Under Inflation Reduction Act (After 1/1/2023)
Improvements must exceed appropriate ASHRAE Improvements must exceed appropriate ASHRAE benchmark by at
benchmark by at least 50% least 25%
Any commercial property OR residential rental Unchanged

property at least 4 stories high, new
construction/renovation both eligible
Deduction of up to $1.88/SF is possible Deduction of up to $5.00/SF is possible
Three key areas: interior lighting, HVAC, building Applicable Dollar Value (ADV ) multiplication factor in play for every
envelope percentage point energy reduction below minimum threshold
(prevailing wage and apprenticeship standards must be met)
Partial deductions permitted Partial deductions not permitted
Can be claimed retroactively (3115) Unchanged

One-time deduction Can be taken every 3 years on an EECB and every 4 years on building
owned by a tax-exempt entity

45L Legacy Program (1/1/2006-12/31/2022) 45L Under Inflation Reduction Act (1/1/2023-
12/31/2032)
*Will be adjusted for inflation annually for projects placed-in-service after 12/31/20
One-time Credit Unchanged
Residential rental property with a maximum of 3 stories, Any size residential rental property may be eligible
new construction and renovation both eligible
Up to $2,000 credit per dwelling unit Up to $5,000 credit per single-family dwelling unit
Up to $5,000 credit for multifamily dwelling unit
Reference standard: 2006 International Energy Reference standard: Energy Star and Zero Energy Ready (ZER)
Conservation Code Home National and Regional Requirements
Units are modeled using a DOE-approved Energy- Energy Star Certification by a licensed professional (PE or RA)
Efficient Home tax credit software and certified by a Zero Energy Ready Home Certification by a “qualified third party”
HERS Rater or equivalent Rater in accordance with IRS
guidelines
3115 method not available, but past returns may be Unchanged

amended
Tangible Property
Regulations
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Tangible Property Regulations Are Still Very Much In Play
and Bonus
Augment the utility of the TCJA Tangible Property Section 179

Energy Incentives
The Tangible Property Regulations Flowchart: Buildings
Routine Maintenance
Perform activity more than once in a 10 year period
Safe Harbor
Does the expenditure

Expense DeMinimis AFS: written policy, $5,000 safe harbor
meet an exception to EXPENSE
Test Safe Harbor Non AFS: policy, $2,500 safe harbor
capitalization?
Small Taxpayer Gross receipts ≤ $10 million, Unadjusted Basis ≤ $1 million,

Safe Harbor Deduct the lesser of 2% unadjusted basis or $10,000
NO
1. Ameliorates a material condition or defect

2. Material addition to, or a major component of, the Unit of Property
3. Materially increase productivity, efficiency, strength, quality, or output
Betterment
*If normal wear and tear occur during taxpayer ownership, return to initial state is not a
betterment, If exact replacement is not available, improved but comparable replacement
is not a betterment
Is the expenditure or
an improvement to
the building’s Adapts UoP to a new or different use from the ordinary use at the time originally placed in
BAR Adaptation
systems or the service YES
Test *1
building’s structural
components?
or 1. Replacement of a component of property after properly deducting a loss
2. Replacement of a component that was sold
3. Replacement of property after claiming casualty loss
Restoration *2 4. Returns UoP to ordinary, efficient operating condition after deterioration
5. Rebuilding of UoP to like-new condition after end of class life
6. Replacement of major component (40% test) or substantial structural part (25% test) *3
NO Unit of Property YES

Building Structure
Building Systems
-HVAC
Is the expenditure material to
-Plumbing
its Unit of Property or material Materiality -Electrical
at the discrete function level Test -All Escalators/elevators
CAPITALIZE
within UoP? -Fire protection and alarm system With option to write off
-Security System YES
remaining depreciable
-Gas Distribution System
NO basis of existing asset
-Items that have different MACRS lives
Assets within UoP performing a major discrete function *2 using Partial Asset
Disposition Election *3
EXPENSE
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* See Reverse for Supplemental Information
Supplemental Information on Capstan’s TPR Flowchart: Buildings
CAPITALIZATION: 1.263A-1(a)(3)(ii) Taxpayers that produce real property and tangible personal property (producers) must capitalize all the
direct costs of producing the property and the property's properly allocable share of indirect costs, regardless of whether the property is sold or
used in the taxpayer's trade or business. Under Sec. 263(a), amounts paid to acquire, produce, or improve tangible property must be capitalized
and not deducted.
*1. BAR TEST: At this level, if the expenditure is determined to be any one of these (Betterment, Adaptation, Restoration), it must be
capitalized.
*2. RESTORATION: It may be difficult to determine whether a restoration is significant enough to require capitalization, as the regulations do not
provide any bright-line quantitative threshold for decision making. However, changes to the examples in the final regulations do indicate some
patterns, from which general guidelines may be extrapolated. See § 1.263(a)-3(k)(7) for relevant examples.
For major components of buildings and building systems, examples imply that a replacement of 40% or less of a major component may not be a
significant portion of the major component, and as such would not be considered a restoration. [Example numbers 18, 21, 23 and 25.]
For substantial structural parts, examples indicate that replacement of 25% of a building’s structure was not considered a large portion of the
substantial structural part, and therefore was not considered a restoration. [Example numbers 27 (30%) and 30 (25%).]
For discrete function, examples indicate that if a material component performs a discrete and critical function, it is a major component of the
building. Incidental components of the UoP generally will not constitute a major component. Relevant example numbers include 14, 15, 16, 17,
18, etc.
*3. PARTIAL ASSET DISPOSITION ELECTION: There may be a tax planning opportunity for taxpayers who purchase
and place assets in service and then begin renovation activities. Assuming that the assets are already "in service," that
the UNICAP provisions of IRC Sec. 263A don’t apply, and that the safe harbor provisions pertaining to IRC Sec. 280B
(demolition) have successfully been met (so that amounts are not capitalized to land), then taxpayers may be able to take
a partial asset disposition election on the assets being disposed of in the renovation.
Additional Note: Detailed examples are contained in the IRS T.D. 9636 of 10.21.13 entitled, “Guidance Regarding Deduction and Capitalization
of Expenditures Related to Tangible Property,” and in all subsequent IRS guidelines released on this topic.
DISCLAIMER: Capstan Tax Strategies, with its issuance of this Flowchart, is not providing tax, legal or accounting advice. This material has been prepared for
informational purposes only. It is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Taxpayers should consult their
personal tax, legal and accounting advisors before engaging in any transaction .
capstantax.com our strength. your tax savings. | capstantax.com Version 2.0

72
1031 Exchanges
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1031 and CSS
▪ 1031 Exchanges -- TCJA excludes personal property from the exchange basis
– But Final Regs state that most 5 and 7-year assets can be considered “real property” for the purpose of a
1031 exchange
– This exclusion may potentially cause a taxable event
▪ Cost Seg -- TCJA allows bonus on acquired assets
– Identifies and costs out 1245 assets
▪ These TCJA changes mean that 1031 exchanges and cost seg studies can be used in
tandem effectively – seeing a lot more interplay between these two very powerful tax
strategies
capstantax.com 74
Polling Question #4

Strategic Hierarchy
capstantax.com 76
Strategic Hierarchy
With $1,000,000 of 179 Expense (As of April 2020)
▪ Hierarchy:
1. Apply TPRs first to determine capitalization.
2. When TPRs are capitalized, then utilize any combination of Section 179 or bonus.
3. When both are utilized, Section 179 receives first priority in reducing basis.
4. Remaining basis is utilized by 100% bonus under the CARES/TCJA
5. Final remaining basis recovered over MACRS life.
9/12/2022 77
HIERARCHY OF EXPENSING 1/1/2022 and BEYOND
Section 179 Bonus
Expense Under the Tangible Expensing Depreciation
Property Regulations
Applies to New Assets
Does De Minimus Safe Harbor Apply? OR
Does Routine Maintenance Safe Harbor Apply? OR Applies to Used Assets
Can asset be written off using BAR/Materiality testing?
Applies to Personal Property
Applies to Elected Qualified Real Property

YES NO
Represents 100% Expensing of Asset

Consider Partial Asset Disposition
Asset Expensed Asset Capitalized Election to write off remaining Applies to Qualified Improvement Property (QIP)
depreciable basis of replaced asset
Applies to Commercial Roofs, HVAC, Fire Protection, Security Systems

Eligible for Section 179
Expensing? Subject to Overall Business Income Limitation
OR
Requires an Affirmative Election Made in the Year the Asset is Placed-In-Service
Can Be Used Retroactively Through CSS Look-Back Study

100% BONUS Depreciation
on Assets with MACRS Lives of 20- Associated Expensing Limit with Inflation Adjustment ($1.08M –2022)
years or Less
Associated Phase-Out with Inflation Adjustment ($2.7M –2022)
MACRS Class Lives May Apply to Property Used 50% or Less for Business (Except Listed Property)
Used to Depreciate
Remaining Basis Requires Recapture if Business Use of Property Falls to 50% or Less (Except Listed Property)
DISCLAIMER: Capstan Tax Strategies, with its issuance of this chart, is not providing tax, legal or accounting advice. The above summary does not
apply in every scenario applicable to Sec. 179 and/or Bonus depreciation and their respective limitations. This material has been prepared for informational
purposes only. It is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Taxpayers should consult their personal tax,
capstantax.com legal and accounting advisors before engaging in any transaction. © Capstan 2020. All Rights Reserved Version 2.0 78
Finding CSS ▪ Have you had any recent activity?
– New Construction
Opportunities – Acquisition
– Renovation
– Energy Retrofit
▪ Have you taken advantage of the following?
– Accelerated depreciation through Cost Segregation (QIP with
bonus boosts results)
– Expensing of eligible assets under the Tangible Property
Regulations
– Partial Asset Disposition to dispose of assets retired, replaced, or
demolished in a renovation?
– Energy-efficient construction incentives like 179D or 45L?
▪ 2017, 2018, and 2019 returns with capital assets
– Rethink your positions with TCJA and CARES Act clarifications

THANK YOU!
Isaac Downing
Regional Director
idowning@capstantax.com
(o) 215.885.7510
(c) 805.341.0142

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Cost Segregation 201:

Current Commercial Real Estate Depreciation Strategies

This information is based on Capstan's understanding of the subject matter; the

• Team has over 100 cumulative years of experience

capstantax.com our strength. your tax savings. 7

Real Estate • Cost segregation is a tax planning strategy in which assets

• Developers who have a strategic vision for their property long-

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Tangible Property Section 179

100% Bonus under the TCJA Accelerated Depreciation

Tangible Property Section 179

The BIG Three Changes Are:

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▪ TCJA Establishes a Mid-Year Bonus Rate Split

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WBC for Purchase of Property WBC for Purchase of Property

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▪ Acquired and placed-in-service in March 2020

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▪ Note impact of TCJA on additional first year cash flow

Additional First Year Cash Flow $8,721 $14,477

10-Year NPV $8,707 $10,076

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▪ Driven by date “substantial construction” begun -- but how do we define “substantial”?

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▪ Proposed Regs 8/8/2018 suggested that date of acquisition of third-party

In short… no matter who did the construction,

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▪ Another strategic win for taxpayers – a gift for construction projects

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▪ Example: WBC date 7/2017, substantial construction 10/2017

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▪ Great time to reconsider cost segregation studies on

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QIP- QIP- QIP-

Broad, easy-to- Long recovery period Short recovery

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Retroactively [remember, only property with a depreciable life

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Are Your 3-Year

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