A strip mall, a shopping center, or a retail plaza can benefit from a cost segregation study if it meets specific criteria. Here are some factors to consider when determining whether a strip mall should undergo a cost segregation study:
Property Value: The potential benefits of a cost segregation study are often more significant for higher-value properties. If the strip mall has a relatively high acquisition cost or is comprised of multiple buildings, the tax savings from cost segregation are more likely to justify the cost of the study.
Building Components: Cost segregation is most effective when components within the strip mall can be reclassified to shorter depreciation periods. These components typically include interior finishes, electrical systems, HVAC systems, plumbing, lighting, and site improvements. If the strip mall has these features, it may be a good candidate for a cost segregation study.
Ownership Structure: The ownership structure of the strip mall can also impact the decision to pursue cost segregation. Suppose the strip mall is owned by an individual, partnership, LLC, corporation, or real estate investment trust (REIT). In that case, cost segregation can be a valuable tax strategy. Different ownership structures may have varying tax implications.
Tax Liability: Consider the strip mall owner’s current and future tax liabilities. Suppose the owner is looking to reduce current tax obligations, improve cash flow, or enhance the return on investment (ROI). In that case, cost segregation may be a suitable option.
Long-Term Ownership: Cost segregation benefits are most advantageous for property owners planning to hold the asset for an extended period. The longer the ownership horizon, the more time there is to realize the tax benefits through ongoing depreciation deductions.
Compliance with IRS Guidelines: Ensure that the cost segregation study is conducted in compliance with IRS guidelines and regulations. This is crucial to avoid potential audit issues and substantiate asset reclassification.
Consultation with Experts: Property owners should consult with qualified cost segregation specialists and tax professionals to assess the potential benefits of a cost segregation study for their specific strip mall property.
In summary, a strip mall should consider a cost segregation study if it meets specific criteria, including property value, the presence of classifiable components, ownership structure, tax liability, long-term ownership plans, and compliance with IRS guidelines. Property owners should consult with experts to conduct a cost-benefit analysis to determine whether the potential tax savings from cost segregation justify the costs associated with the study. Cost segregation can be a valuable tool for optimizing tax benefits and improving the financial performance of a strip mall property.