When a property owner replaces a component of their building, such as a roof, HVAC system, or plumbing, the cost of the new component is typically capitalized and depreciated over its useful life. 

However, the remaining undepreciated value of the old component is often overlooked. PAD enables property owners to write off this remaining value, thereby realizing a tax deduction.

Without a cost segregation study, this is not possible!

Example:

You have a commercial building where you decide to replace the HVAC system. The original HVAC system cost $100,000 (based on the cost seg study after acquisition) and has a useful life of 15 years. 
After 10 years, you are told it has gone but and you need to install a new HVAC system.

1. Original Cost: $100,000.
2. Depreciation Taken: Over 10 years since you bought the property, total depreciation on the HVAC is $66,666.70.
3. Remaining Basis: $100,000 - $66,666.70 = $33,333.30.
4. Recognize the Loss: You can now recognize a loss of $33,333.30 for the disposed HVAC system, reducing your real estate profit, and potentially creating a loss!

When you eventually sell your real estate, we need to calculate the depreciation recapture.  There is a myriad of misconceptions surrounding this.  By utilizing a cost seg study, we will know the land vs building vs component values.

Over time, certain short lived assets such as furniture in fixtures technically do no "appreciate" in value.  Therefore, we can allocate MORE of the gain to either the land (if you are in a highly appreciated area) or long term building components which have a lower recapture rate.

This is a crucial long term strategy that is often overlooked but assists many real estate investors in lowering their total tax impact at a sale.

Questions?  Drop our team a note and we'd love to help!