A Real Estate Analysis that can save you Tax Money
By: Joseph B. LaPray
It is no secret that the engineering acronym, KISS (Keep It Simple, Stupid), does not apply when calculating taxable income. A smart business owner knows that when a nonresidential building is purchased, the simplest way to determine the taxable basis in the asset is not necessarily the best. For example, when calculating taxable income, the depreciation expense on a nonresidential building is calculated using a straight line method over a 39-year life. The quick and simple way to calculate the depreciation expense is to take the building's entire purchase price and depreciate it to zero over 39 years. In this case, simplicity could result in unnecessarily slow depreciation and higher income taxes. There is a smarter way.
Real estate appraisers are often called upon to help businesses save money on property taxes, but they can also help reduce long-term income taxes for businesses which acquire nonresidential buildings. The Omnibus Budget Reconciliation Act of 1993 lengthened the depreciable life of nonresidential real property from 31.5 years to 39 years, in effect lowering the annual depreciation expense which a business can claim when calculating taxable income. Real estate appraisers know that it is not necessary to wait 39 years to depreciate the full acquisition cost of a building because only a portion of the cost relates to the building itself. Virtually all building acquisitions include some personal property or site improvements, assets which can and should be depreciated faster than a building. Properly allocating a portion of your building's purchase price to faster depreciating assets requires an appraiser experienced in costing real estate.
Our office routinely develops cost approach analyses of buildings which involve breaking down the value of a building into its component parts (land, structure, fixtures, and site improvements). Allocating the purchase price of a building into its component parts can establish a depreciable basis in individual asset categories. Personal property components of a building such as office fixtures, burglar alarm systems, kitchen appliances, carpeting, and dust control systems can generally be depreciated on the double declining balance method over a seven-year period. Site improvements such as fencing, exterior lighting, and landscaping can be depreciated on a 150% declining balance over a 15-year period. Because personal property and site improvements can be depreciated faster than buildings, taxable income can be reduced by allocating as much of a building's purchase price as possible to the fast-depreciating assets. An allocation of purchase price appraisal will use the "Value-In-Use", or turnkey standard to report thefull value of personal property and site improvements. Turnkey value recognizes not just replacement costs (which include the item price, plus soft costs such as sales tax, freight, engineering costs, installation charges, and supervision), as well as additional turnkey factors such as financing charges during construction, and contractor's contingencies, overhead, and profit.
Simplicity is not a virtue when accounting for acquisitions. Obtaining a cost allocation analysis of your building's purchase price (which will segregate assets into their proper categories) will allow you to realize the maximum allowable depreciation. Faster depreciation rates mean lower taxable income and long-term tax savings. Waiting 39 years to fully depreciate the purchase price of your assets could cost you more than you ever imagined. 
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