Income Taxes Reduced Through Cost Segregation – Lodging Owners
Income taxes are just one of the variety of taxes lodging owners face when running a profitable property. Operation expenses for labor, utilities, insurance, and property taxes are substantial. Property tax appeals can also be a challenge in states with high property taxes and aggressive assessors, such as Texas. Hospitality investors should try to keep as much of their profit as is lawful. However, while they focus laser-like attention on numerous details of the business, many overlook an important issue – income taxes specifically the depreciation schedule.
While the depreciation schedule sounds like an arcane accounting issue, it has the potential to reduce federal income taxes and sharply increase net after-tax profit. In many cases, an owner can impact net profit by spending one hour addressing the depreciation schedule versus spending days or weeks trying to contain labor, utility or insurance expenses.
The depreciation schedule is the document used to calculate depreciation, a non-cash income tax deduction. The typical methodology for preparing the depreciation schedule involves guesstimating the land value and assigning the balance of the cost basis to long-life depreciation (39 years for hotels and lodgings). In some cases, a modest portion is assigned to short life property.
Hotel/lodging investors can reduce income taxes by increasing depreciation. A cost segregation study increases depreciation by accurately allocating a portion of the improvement cost basis to short-life property (which depreciates over five, seven or 15 years).
The following is a summary of the proportion of the cost basis of improvements for hotels and lodgings that can typically be categorized as short-life property.
| Depreciation Life (years) |
Proportion of Improvement Cost Basis |
| 5 year |
14% |
| 7 year |
5% |
| 15 year |
23% |
Income taxes are reduced because more income is taxed at the capital gains rate (up to 15%) instead of at the ordinary income tax rate. Income taxes are postponed until the hospitality property is sold. Hotel/lodging owners work hard and do not deserve to pay income taxes in excess of what is lawful. A cost segregation study prepared by an experienced expert can limit federal income taxes and accurately document the depreciation schedule.
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Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
City:
- New Orleans, LA
- Las Vegas, NV
- Memphis, TN
- Philadelphia, PA
- Tampa, FL
- Hartford, CT
- New York, NY
- Miami, FL
- Washington, DC
- San Francisco, CA
- Austin, TX
- Bakersfield, CA
- Jackson, MS
- Poughkeepsie, NY
- Baton Rouge, LA
- Birmingham, AL
- Harrisburg, PA
- El Paso, TX
- Palm Bay, FL
- Kansas City, MO
- Oxnard, CA
- Sacramento, CA
- Toledo, OH
- Nashville, TN
- Tulsa, OK
- Chicago, IL
- Akron, OH
- San Jose, CA
- Des Moines, IA
- Detroit, MI
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Manufacturing/processing
- Lodging
- Medical facility
- Mobile home park
- Country club
- Used car lot
- Health spa
- Daycare center
- Medical office
- Warehouse
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Golf courses and country clubs
- Air transportation
- Apparel manufacturing
- Laundry facilities
- Food manufacturing
- Arts, Entertainment, and Recreation
- Wood product manufacturing
- Electronic and appliance stores
- Metal manufacturing
- Furniture manufacturing
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