Cost Segregation and REITs... Explained. Improve financial results. Attract targeted investors.
REITs can benefit significantly from cost segregation studies. Cost segregation minimizes ordinary income to maximize return of capital and/or capital gain related distributions. It also creates flexibility to achieve various dividend objectives. The intrinsic benefits of REIT’s combined with cost segregation can result in significant federal tax savings for investors.
- A cost segregation study can decrease a REIT’s operating income, allowing the REIT to distribute additional income as tax-free return on capital to high tax bracket shareholders or retain additional cash for investment opportunities.
- A cost segregation study can provide immediate reduction in ordinary income through increased depreciation in exchange for more Section 1231 capital gains in the future.
IRS Guided. Cost segregation is a conservative, IRS defined approach implemented by O’Connor & Associates’ professional real estate appraisers to update depreciation schedules for correct component allocation. Utilizing appraisers allows our clients to realize considerable cost efficiencies. Our fees are typically one-half those charged by non-appraisal firms for comparable properties.
Depreciation Strategy is Key to Dividend Results
- If a higher tax bracket shareholder is targeted, a cost segregation study enables a REIT to maximize return on capital. This minimizes the effective tax rate to the investor/shareholder.
- Relationships between dividend payout distributions across ordinary income versus capital gains versus return on capital are key for maximizing dividend yield and are often key in the growth of specific targeted investor groups.
How Do We Work With REITs?
We begin our analysis by determining the strategic role as well as financial objectives, operating policies and experience of each of the three groups of funds:
- Private funds
- Funds registered with the SEC but not traded, and
- Funds publicly traded
In particular, we evaluate the REIT’s philosophy regarding growth via acquisition of new portfolios versus growth via property or portfolio appreciation and the resulting gains.
A REIT which has recently privatized or is positioning to do so is an excellent candidate for cost segregation.
We analyze a portfolio in advance of it becoming a REIT. Specifically, an UPREIT usually consists of an Existing Partnership representing several properties and a new REIT that is contributing cash to create an Operating Partnership. Often, it is beneficial for the Existing Partnership to optimize its cash flow via cost segregation before integrating all or some of its properties into the Operating Partnership.
The O'Connor & Associate's Difference
- O'Connor & Associates is the industry leader in "look back" studies having done more studies benefiting from Section 481a than any other boutique firm in the nation. Commercial appraisal is a core competency of our firm with extensive expertise in defining property values across dozens of land uses. We can establish and analyze a cost basis when such details are not available from original construction documents
- Since 1992, O'Connor & Associates combines the right balance of tax, accounting, valuation and real estate expertise without "over-engineering" what the IRS requires. This balance is reflected in our solidly competitive fees
- O'Connor & Associates’ best résumé on the professional background of our team are the published testimonials and on-the-spot references available from our satisfied clients.
- O'Connor & Associates’ project turnaround is 4-6 weeks. Under special circumstances, it can be as short as 10 business days. This reflects our flexibility, customer focus and a well-tuned business process for generating cost segregation studies.
- O'Connor & Associates streamlined our approach so your team is contacted by only one professional who collects information and coordinates technical requirements related to documentation, site visits, clarifications, etc.
- The O'Connor & Associates goal is to be upfront, honest and handle our client relationships with the utmost integrity. We know how important that is in today's business environment
Click here to request a free no-obligation estimate of tax savings for your property.
For more information, contact Mike Olivares, Director, Federal Tax Reduction Consulting at 1-800-856-7325
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