Automating Part of a Tax Break for CRE

There’s a sophisticated tax reduction strategy for real estate. Called cost segregation, it recognizes that a property is not a unified whole. There is the land, building, HVAC, plumbing fixtures, furniture, and so on. A clever use of software to make it easier to manage is one example of subtle ways technology can help CRE.

Interior and exterior components of the property, under the tax codes, likely have different allowable depreciation periods. According to tax consultancy KBKG, “On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure,” typically using 5-, 7-, and 15-year periods to lower taxes and increase cash flow.

But remembering that there is no such thing as a free lunch, there is a cost to using the strategy: effort. Someone has to do the study to determine the breakdown of depreciation categories. According to the IRS, “In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law are also important criteria.”

A study needs documentation. The U.S. Energy Information Administration, says there are an estimated 5.9 million commercial buildings in the country. Of these, about half were built before 1980 and only about 12% of the stock was built since 2003 and close to 80% is older than 2000.

Real estate digitization firm Integrated Projects (IPX) and tax planning and advisory firm Corporate Tax Advisors claim to be marrying the digital and the physical with a service they call Cost Seg Survey. The companies claim that of the 1999 and earlier buildings, “Nearly every one of those buildings has outdated plans and documentation.” Any changes from the original would need documentation to help a cost segregation study be accurate.

“Traditionally, executing cost segregation studies and obtaining accurate as-built documentation required hiring multiple vendors, a process often inefficient and prone to inaccuracies,” the firm. “Cost Seg Surveys enable real estate owners to obtain valuable verified 3D and 2D assets along with a certified cost segregation study for nearly the same price as a traditional study.”

What is interesting here is the idea of how technology can aid in documentation of physical spaces. The use of 3D scanning of spaces and conversion of the data into layouts, measurements, blueprints, and more will increasingly have important applications into construction management, design, insurance, property appraisals, property maintenance, and other aspects of CRE.