| A casualty loss may occur as a result of a flood, | | | | hand offered by congress and take the tax |
| hurricane, tornado, mudslide or other natural disaster. | | | | deduction. |
| The intuitive thought pattern is: “My apartment | | | | Cost segregation produces tax deductions and |
| complex worth $5,000,000 suffered major damage | | | | reduces federal income taxes across the country and |
| totaling $1,500,000 for repairs and rent loss. | | | | in every size market. Below are just a few examples |
| Fortunately, I was completely covered for both | | | | of cities where cost segregation generates |
| physical damage and rent loss, other than a small | | | | meaningful tax deductions. |
| deductible. There is clearly no casualty loss I can claim | | | | City: |
| as a tax deduction, right?” | | | | Memphis, TN |
| Tax deductions are the basis for tax reduction. Tax | | | | San Francisco, CA |
| deductions reduce taxable income but do not directly | | | | New Orleans, LA |
| reduce federal income taxes. For example, $100,000 | | | | New York, NY |
| of tax deductions reduces federal income taxes by | | | | Hartford, CT |
| $35,000 ($100,000 X 35%), assuming a 35% tax rate. | | | | Las Vegas, NV |
| Most tax deductions require a cash expenditure | | | | Los Angeles, CA |
| (labor, material, supplies, utilities, etc). A current period | | | | Atlanta, GA |
| cash expenditure is not required for some real estate | | | | Orlando, FL |
| tax deductions and may not be required for a | | | | Miami, FL |
| casualty loss. | | | | Louisville, KY |
| Most real estate owners and investors do not | | | | Salt Lake City, UT |
| consider casualty losses as a source of tax | | | | Boise, ID |
| deductions. Few investors claim the casualty loss tax | | | | Lakeland, FL |
| deduction the federal income tax code allows them. | | | | Wichita, KS |
| Let’s review the criteria for a casualty loss tax | | | | McAllen, TX |
| deduction and the thought process regarding | | | | Columbus, OH |
| acquisition of a property that has suffered a casualty. | | | | Ft. Lauderdale, FL |
| Real estate owners suffer a casualty loss when the | | | | San Antonio, TX |
| market value immediately after the casualty plus | | | | Durham, NC |
| insurance proceeds is less than the market value | | | | Allentown, PA |
| immediately before the casualty. The complex issue is | | | | Youngstown, OH |
| how to value the property immediately after the | | | | Little Rock, AR |
| casualty. Let’s consider a 1-story suburban office | | | | Greensboro, NC |
| park in Mississippi which suffered 3-feet of flooding | | | | Greenville, SC |
| due to Hurricane Katrina. Let’s further assume: 1) | | | | Kansas City, MO |
| 8 feet of sheet rock must be replaced in the entire | | | | Raleigh, NC |
| property to rebuild, 2) although the property was | | | | San Jose, CA |
| 90% occupied before the flood, occupancy is | | | | Palm Bay, FL |
| expected to only be 5% while rebuilding occurs, 3) | | | | Honolulu, HI |
| stabilized occupancy after renovation is not clear | | | | >/p> |
| since some businesses may not return, 4) | | | | Cost segregation produces tax deductions for |
| construction will take 12-18 months due to the labor | | | | virtually all property types, including the following: |
| constraints and 5) the owner has casualty insurance | | | | Property Type: |
| to rebuild but did not have rent loss/business | | | | Regional mall |
| interruption insurance. | | | | Service station |
| It is clear the market value after the casualty is less | | | | Drugstore |
| than the market value before the casualty less | | | | Night club |
| construction costs. Other factors to consider are: | | | | Supermarket |
| rent loss, market risk that not enough tenants will be | | | | Racket club |
| available after construction is completed, cost of | | | | Auto service garage |
| construction management, a illiquid market with few | | | | Airplane hangar |
| buyers just after the casualty, construction risk, | | | | Nursing home |
| interest rate risk (rates could rise during the | | | | Subsidized housing |
| construction period negatively affecting value), risk | | | | Almost every industry, including the following, can |
| that operating expenses could increase during the | | | | generate cost-efficient tax deductions by using cost |
| construction period (perhaps insurance) and | | | | segregation. |
| compensation for entrepreneurial effort to induce a | | | | Industry: |
| buyer to coordinate labor capital, management and | | | | Nondurable good wholesalers |
| compensation for capital during the reconstruction | | | | Durable good wholesalers |
| and releasing process. | | | | Day care facilities |
| A careful analysis by an appraiser might show the | | | | Computer and electronic manufacturing |
| improvements have no value after the flood. In | | | | Health care facilities |
| appraisal assignments performed by the writer, a | | | | Chemical manufacturing |
| casualty loss of 10-30% of the market value before | | | | Printing activities |
| the casualty has occurred (in a straight-forward, | | | | Warehousing and storage |
| defensible analysis) is typical. This can generate a | | | | Electronic and appliance stores |
| meaningful casualty loss (and tax deduction). | | | | Apparel manufacturing |
| For example, a property with a market value of | | | | The appraisal division of O’Connor & Associates |
| $5,000,000 suffers a 30% casualty loss. While the | | | | is a national provider of commercial real estate |
| casualty is a serious hardship for the owners, the | | | | appraisal services including cost segregation studies, |
| $1,500,000 ($5,000,000 X 30%) tax deduction will | | | | due diligence, insurance valuations, feasibility studies, |
| mitigate the financial loss. | | | | financial modeling, gift tax valuations, commercial real |
| Congress provided a casualty loss tax deduction to | | | | estate appraisal, highest and best use analyses, |
| encourage investment in real estate. If you have the | | | | casualty loss valuations and HUD map market studies. |
| misfortune to suffer a casualty loss, take the helping | | | | |