WHAT IS COST SEGREGATION?

Cost segregation uses an engineering study to identify and segregate assets embedded in a building’s construction or acquisition costs and can be depreciated over five, seven or 15 years, rather than the standard 27.5 or 39 years. This allows a REIT to identify more of the allowable portion of a building’s cost as personal property to accelerate non-cash depreciation and decrease taxable income.

HOW CAN REITS BENEFIT?

Cost segregation provides three primary benefits for a REIT:

1. By reducing current taxable income, a REIT can retain additional cash to fund future acquisitions or opera-tions while continuing to comply with IRS rules that generally require a 90 percent payout of taxable income through dividends.

2. If a REIT’s dividend payments exceed the required distribution portion of taxable income after a study is completed, those dividends are classified as return of capital or capital gain if there are no current or accumulated earnings and profits.

3. A properly prepared cost segregation report will identify and assign value to the building’s various components. This includes allocating value to the nine building systems identified in recent IRS tangible property regulations. These schedules may help you identify and properly dispose of tangible property during future repairs and renovations.

ATTRACTING INVESTORS

With recent federal tax rate increases, more investors are considering the consequences of income-producing investments. REIT dividends are subject to as much as a 39.6 percent top federal tax rate, rather than the 20 percent applied to other corporate dividends. When Medicare and state tax rates are considered, an investor could pay as much as 50 percent on REIT dividends.

When a REIT completes a cost segregation study on one or more buildings, it can accelerate non-cash depreciation and decrease current taxable income, which may rechar-acterize dividends as return of capital or capital gain.

experience insight // Real estate investment trust (REIT) executives can feel overwhelmed by the need to meet dividend objectives, fund future acquisitions and attract investors. BKD can help. Our cost segregation professionals can help you reduce current taxable income—providing flexibility in how and when you distribute dividends.

REAL ESTATE INVESTMENT TRUST COST SEGREGATION

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WHY CHOOSE BKD?

BKD is one of the largest cost segregation service providers in the U.S. Our dedicated team of engineers and tax professionals perform hundreds of studies every year for clients across the country. In addition, more than 150 other CPA firms put their trust in the BKD cost segregation team and outsource work to us.

BENEFITS FOR PRIOR YEARS

Under current IRS rules, you can perform a cost segregation study on a building that was placed in service during a prior year and catch up the additional depreciation amount to which you were entitled. Amended returns are not required, so it doesn’t matter if the statute of limitations has closed for the year the property was placed in service.

REAL ESTATE INVESTMENT TRUST COST SEGREGATION

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