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