cost segregation · this presentation is neither an offer to sell nor a solicitation of an ......

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Cost SegregationAn IRS-approved valuation analysis

that potentially can provide tax deferral

for REIT Investors

FOR USE WITH BROKER DEALERS, TAX AND LEGAL PROFESSIONALS ONLY. This presentation is neither an offer to sell nor a solicitation of an offer to

buy interests in any program sponsored by Inland Real Estate Investment Corporation or its affiliates. The Inland name and logo are registered trademarks being

used under license. Inland Securities Corporation serves as dealer manager for funds sponsored by Inland Real Estate Investment Corporation. Inland Securities

Corporation, member FINRA/SIPC.

Creative. Well-Structured. Differentiated Products.

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Disclaimer

For Use with Broker Dealers, Tax and Legal Professionals. Dissemination to prospective investors prohibited. This is neither an offer to sell nor a solicitation of an offer to buy any security, which can be made only by a prospectus which has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers authorized to do so. An offering is made only by means of the prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates. A copy of the prospectus must be made available to you in connection with any offering. Neither the Securities and Exchange Commission nor any other state securities regulator has approved or disapproved of the securities of any Inland Real Estate Investment Corporation-sponsored program, or determined if the prospectus for such securities is truthful or complete. Any representation to the contrary is unlawful.

Any forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

The companies depicted in the photographs herein may have proprietary interests in their trade names and trademarks and nothing herein shall be considered to be an endorsement, authorization or approval of any of the REITs that are, or have been, sponsored by Inland Real Estate Investment Corporation (“Inland Investments”). When making an investment decision, investors should not rely on past performance of the REITs or investment programs sponsored by Inland Investments to predict future results. An investment in an Inland REIT will not entitle an investor to ownership in any other REIT or investment program sponsored by Inland Investments.

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Important Risk Factors to Consider

Cost Segregation may be used by both traded and non-traded REITs and any other type of company. However, the specific discussions herein, and the risk factors below, relate to an investment in a non-traded REIT.

Some additional risks related to investing in a non-traded REIT include and the use of cost segregation, but are not limited to:

• The board of directors, rather than the trading market, determines the offering price of shares; there is limited liquidity because shares are not bought and sold on an exchange; repurchase programs may be modified or terminated at any time; a typical time horizon for an exit strategy is longer than five years; and there is no guarantee that a liquidity event will occur.

• Distributions cannot be guaranteed and may be paid from sources other than cash flow from operations, including borrowings and net offering proceeds. Payments of distributions from sources other than cash flow from operations may reduce the amount of capital a REIT ultimately invests in real estate assets and a stockholder’s overall return may be reduced.

• Failure to qualify as a REIT and thus being required to pay federal, state and local taxes, which may reduce the amount of cash available for distributions.

• Principal and interest payments on borrowings will reduce the funds available for other purposes, including distributions to stockholders. In addition, rates on loans can adjust to higher levels, and there’s a potential for default on loans.

• Conflicts of interest with, and payments of significant fees to, a business manager, real estate manager or other affiliates.

• Commercial real estate market risks such as local property supply and demand conditions, tenants’ inability to pay rent; tenant turnover; inflation and other increases in operating costs; adverse changes in laws and regulations; relative illiquidityof real estate investments; changing market demographics; acts of God such as earthquakes, floods or other uninsured losses; interest rate fluctuations; and availability of financing.

• New legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws and these changes may adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on a stockholder’s investment, the market value or the resale potential of a REIT’s assets or the strategies described herein. Youare urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments or proposals and their potential effect on an investment in a non-traded REIT.

The Inland name and logo are registered trademarks being used under license.

This material has been distributed by Inland Securities Corporation, member FINRA/SIPC.

First Publication Date: April 15, 2014 Current Publication Date: February 11, 2016

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Learning Objectives

• Learn the different levels of tax obligations

for REIT investors

• Define cost segregation

• Understand how cost segregation works

as a tax strategy for REIT stockholders

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• Current tax environment

• Commercial real estate ownership

opportunities

• REIT investor taxes

• Cost segregation

– What it is, history, methodology, and potential tax

deferral benefits for REIT investors

• Example 1099 DIV

• Summary

Agenda

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2016 Taxes for Individuals

Effective January 1, 2016:

• 39.6% for taxable incomes over $466,950 ($415,050 for single filers)Top marginal tax rate

• The .9% Medicare surtax will be withheld by employers for those employees whose wages exceed $200,000Medicare surtax

• The tax rate on dividends and capital gains is 20%.Tax rates on investment

• Phase out of personal exemptions for adjusted gross income (AGI) over $309,900 ($258,250 for single filers)Personal exemptions

• Phase down of itemized deductions for AGI over $311,300 ($259,400 for single filers) Itemized deductions

• The social security portion of the payroll tax is 6.2%. Payroll tax

6*Source: IRS. 2016 Tax Forms and Instructions. https://www.irs.gov/pub/irs-drop/rp-15-53.pdf

https://www.irs.gov/pub/irs-drop/rp-13-35.pdf


Commercial Real Estate Ownership

Ownership

Interest

What Investors Own Investor Tax Liability

During Ownership

Investor Tax Liability

Upon Sale of Interest

Direct

Interest

Property (the bricks and

mortar) either individually

(own the entire building) or

shared interest (own a part of

the building).

• Property taxes & taxes on

net income

• Personal income taxes

Other liabilities may include:

special assessments, special

taxes, property expenses,

etc.

• Long-term capital

gains*

• Recapture (25% of

depreciation)

Indirect

Interest

Stock or interest in a

company or fund - a REIT

(non-traded & traded), mutual

fund or exchange traded fund

for example.

• Personal income taxes,

including dividends taxed

at ordinary income rates.

REIT or owning entity is

responsible for property-level

taxes and expenses.

• Long-term capital

gains*

• No recapture on

sale of

stock/interest.

*Assumes appropriate holding period is met.Source: Real Capital Analytics Commercial Real Estate Glossary: https://www.rcanalytics.com/glossary/n/noi-net-operating-income-.aspx

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https://www.rcanalytics.com/glossary/n/noi-net-operating-income-.aspx


REIT vs. Corporate Dividends

*IRS. Publication 17. http://www.irs.gov/publications/p17/ar01.html

*The Wall Street Journal. “Congress looks at REIT Exemption.” April 24, 2013.

• Subject to a top income tax rate of 39.6%*REIT Dividends

• Subject to a top income tax rate of 20%*

Other Corporate Dividends

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http://www.irs.gov/publications/p17/ar01.html


Three Levels of REIT Dividend Taxation

1 - Average of personal state income tax rates for 2015 (all 50 states and Washington, D.C.) for married filers with taxable income over $464,850.

Source – “Tax Rates by State” www.tax-rates.org The Federal & State Tax Information Portal

• Top marginal tax rate increased from 35% to 39.6%. REIT dividends generally are taxed at your ordinary rate up to 39.6%.

Federal TaxRate

• A new 3.8% surtax on investment income for taxpayers with taxable income exceeding $250,000 ($200,000 for single filers).

Medicare TaxRate

• Average 5.63%1State Tax Rate

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http://www.tax-rates.org/


Top Tax Rate Per State*

Average State Tax Rate = 5.58%**

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*As of January 1, 2016.

Does not include federal

and local taxes.

**Average of personal

state income tax rates

for 2016 (50 states and

Washington D.C.) for

married filers with

taxable income over

$400,000.


Can REITs do anything to

defer or reduce the amount of

taxes imposed on

distributions?

Yes.

Taxes on Distributions

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Depreciation

Depreciation is an expense recognized for both financial reporting and federal income tax purposes.

The net income (loss), for tax purposes, is determined after subtracting depreciation expense, which ultimately affects the tax obligations of the owning entity and its investors.

Asset Useful Life

Non-residential

building

39 years

Residential building 27.5 years

Land improvements,

sidewalks, shrubbery,

etc.

15 years

Fixtures 7 years

Rental property

furnishings,

appliances , carpets

5 years

Types of electronic

equipment

3 years

Source – IRS Publication 946. http://www.irs.gov/publications/p946/index.html

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http://www.irs.gov/publications/p946/index.html


Cost Segregation: A brief history

Cost Segregation is used by both public and

private companies. The concept has been

around for over 50 years.

• Shainberg v. Commissioner1959

• Hospital Corporation of America v. Commissioner

1997

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Cost Segregation is an

IRS-approved valuation

analysis that allows

owners of real estate to

identify different

components of an asset

with shorter depreciable

lives, which could result in

a larger amount of

depreciation expense.

Cost Segregation: What is it?

IRS Section 1250 -

Real Property

IRS Section 1245 -

Personal Property

Structural building

components

Non-structural building

components

Depreciated over

27.5 – 39 years

Depreciated over 5, 7,

or 15 years

Straight-line

depreciation

Eligible for double

declining, or accelerated

depreciation.

Examples: building

(bricks and mortar)

Examples: electrical

components, light poles,

plumbing components,

parking lot, lighting,

equipment, shelving,

etc.

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Example: Multifamily Apartment Building

Tax Basis

Purchase Price : $10,000,000

Land Allocation: $3,000,000

Total Depreciable Tax

Basis:

$7,000,000

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Special Electric

Concrete Patio

Brick & Mortar

Roof

Pool

Plants & Beds

Refrigerator

Countertops

Pantry Cabinet

Dishwasher

Stair Construction

Washer/Dryer



Brick & Mortar

Roof

IRS Section 1250 - Real Property

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PoolConcrete Patio

Plants & Beds

Stair Construction

IRS Section 1245 – Personal Property

Countertops Washer/Dryer

Pantry Cabinet

Refrigerator

DishwasherSpecial Electric



Cost Segregation Study Schedule

Building Components $ Allocation of Basis as per Cost Segregation Analysis

Cost 5 Year 27.5 Year

Cabinets/Millwork $ 8,843.53 8,843.53 $-

Moldings $ 5,596.42 5.596.42 $-

Flooring – Vinyl Tile $ 1,822.73 1,822.73 $-

Flooring – Carpet $ 2,870.73 2,870.73 $-

Decorative Flooring $ 191.56 191.56 $-

Window Treatments $ 2,081.80 2,081.80 $-

Communication / Data $ 1,030.40 1,030.40 $-

Specialty Plumbing – Laundry &

Kitchen Sinks$

4,230.82 4,230.82$-

Security / Exterior Lighting $ 391.90 391.90 $-

Interior Windows $ 109.84 109.84 $-

Unit Mailboxes $ 126.26 126.26 $-

Entry Canopies $ 349.28 349.28 $-

Building Structure $ Cost 5 Year 27.5 Year

Structural Components $ 30,946.71 $- 30,946.71

Roofing Systems $ 1,883.77 $- 1,883.77

Foundations $ 8,951.64 $- 8,951.64

HVAC $ 4,226.91 $- 4,226.91

Electrical $ 10,371.20 $- 10,371.20

Tax Basis

Purchase Price $10,000,000

Land Allocation $3,000,000

Total

Depreciable

Tax Basis

$7,000,000

Placed-in-Service Date

8/24/2015

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Example Continued: Multifamily Apartment

Bldg. Cost Segregation Study Schedule

Building Structure $ Allocation of Basis as per Cost Segregation Analysis

Cost 5 Year 27.5 Year

Plumbing $ 8,923.25 $- 8,923.25

Fire Protection & Alarm $ 6,492.61 $- 6,492.61

Exterior Façade / Building Skin $ 8,294.38 $- 8,294.38

Doors & Frames $ 8,962.88 $- 8,962.88

Windows $ 5,875.34 $- 5,875.34

Ceiling Systems $ 3,535.97 $- 3,535.97

Interior Framing / Partitions $ 10,521.52 $- 10,521.52

Elevator $ 2,116.44 $- 2,116.44

Painting $ 4,161.39 $- 4,161.39

Parking Garage $ 29,518.83 $- 29,518.83

Total Building Cost $ 172,428.11 27,645.27 144,782.84

% of Building Cost 16.0% 84.0%

Tax Basis



Total

Depreciable

Tax Basis

$7,000,000


8/24/2015

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Example: Multi-tenant Retail

Shopping Center

Tax Basis

Purchase Price : $10,000,000

Land Allocation: $3,000,000

Total Depreciable Tax

Basis:

$7,000,000

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Shopping Center

Brick & Mortar

Decorative Molding

Track Lighting

Special Electrical

Parking Lot

Plumbing

Roof

Sidewalk

Trash Compactor

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Shopping Center

Brick & Mortar

Decorative Molding

Track Lighting

Special Electrical

Parking Lot

Plumbing

Roof

Sidewalk

IRS Section 1250 - Real Property IRS Section 1245 - Personal Property

Trash Compactor

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Example Continued: Multi-tenant Retail

Cost Segregation Study Schedule

Master Format

Division Descriptions

Allocation of Basis as per Cost Segregation Analysis

5 Yr. 7 Yr. 15 Yr. 39 Yr. Totals

Masonry $ - $ - $27,608 $1,290,579 $1,318,187

Metals $7,390 $ - $12,668 $471,839 $491,897

Woods, Plastics & Composites $36,578 $ - $ - $15,720 $52,298

Thermal & Moisture Protection $ - $ - $ - $263,827 $263,827

Openings $41,583 $ - $ - $178,241 $219,824

Finishes $220,048 $ - $ - $760,830 $980,878

Trash Compactor Equipment $ - $16,435 $ - $ - $16,435

Equipment $147,294 $ - $ - $ - $147,294

Furnishings $42,907 $ - $ - $ - $42,907

Plumbing $42,515 $ - $ - $116,666 $159,181

Heating, Ventilating, and Air

Conditioning$ - $ - $ - $613,577 $613,577

Electrical $494,860 $ - $234,005 $674,910 $1,403,775

Electronic Safety and Security $156,285 $ - $ - $14,871 $171,156

Earthwork $ - $ - $117,332 $79,855 $197,186

Exterior Improvements $ - $ - $831,558 $ - $831,558

Utilities $ - $ - $70,469 $19,551 $90,020

Total $1,204,868 $1,294,666 $4,500,466 $7,000,000

Percentages of Total Basis Allocation 16.99% .23% 18.48% 64.29% 100.00%

Tax Basis



Total

Depreciable

Tax Basis

$7,000,000


12/31/2013

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$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Year

1

Ye

ar

4

Year

7

Year

10

Year

13

Year

16

Year

19

Year

22

Year

25

Year

28

Year

31

Year

34

Year

37

Straight Line Depreciation

If the REIT chose not

to conduct a cost

segregation analysis,

it could expect a

steady depreciation

expense over time.

Dep

recia

tio

n

Example Continued: Straight Line

Depreciation

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Example Continued: Accelerated

Depreciation – Multifamily

If the REIT chose to implement a cost segregation study, on an asset-by-

asset basis, cost segregation should accelerate depreciation deductions.

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Example Continued: Accelerated

Depreciation – Multi-tenant Retail

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Year1

Year3

Year5

Year7

Year9

Year11

Year13

Year15

Year17

Year19

Year21

Year23

Year25

Year27

Year29

Year31

Year33

Year35

Year37

Year39

Straight Line Depreciation Cost Segregation

De

pre

cia

tio

n

If the REIT chose to implement a cost segregation study, on an asset-by-

asset basis, cost segregation should accelerate depreciation deductions.

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Considerations

• Each stockholder’s tax circumstances are unique, and this information does not constitute tax advice for any

particular stockholder.

• Stockholders must consult with their own tax or financial advisors for an in-depth discussion regarding tax deferral

strategies.

• There are tax-related risks related to investing in a REIT, including the risk that early stockholders may receive tax

benefits from a REIT’s election to accelerate depreciation expense deductions of certain components of its

investments, including land improvements and fixtures, which later stockholders may not benefit from.

• In addition, a greater percentage of distributions during these earlier years likely will be characterized as a return

of capital, reducing the stockholder’s tax basis in the REIT stock (or capital gain if the stockholder’s tax basis in

the REIT stock is reduced to zero). This reduction in a stockholder’s tax basis in the REIT stock may increase the

amount of gain recognized by the stockholder upon sale of the REIT stock.

• Increased depreciation expense deductions in the earlier years after acquisition of an asset, for federal income tax

purposes, of certain components of our investments through the use of cost segregation studies, our early

investors may benefit to the extent that increased depreciation causes all or a portion of the distributions they

receive to be considered a return of capital for federal income tax purposes thereby deferring tax on those

distributions, while later investors may not benefit to the extent that the depreciation of these components has

already been deducted.

• Advisors must understand stockholders’ tax obligations.

• There is no assurance that the results of a cost segregation study will cause the amount of earnings and profits to

be reduced which may, therefore, result in a portion of the distribution being treated as a return of capital, and

thus taxed at a lower rate than ordinary income.

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Definitions

• Any distributions paid to stockholders out of a company’s earnings and profits. These are taxed as ordinary income - unless they are “qualified dividends.”

Ordinary Dividends

• A type of dividend to which capital gains tax rates apply. These tax rates are usually lower than regular income tax rates.

Qualified Dividend

• A type of distribution that is paid to stockholders of a corporation not as a result of earnings, but as a return of capital. Stockholders who receive non-dividend distributions must reduce the basis in their stock accordingly, but not below zero. Upon the sale of the stock, the resultant gain or loss will be calculated from the adjusted basis. When a stock is sold for a profit, the portion of the proceeds over and above the purchase value (or cost basis) is known as capital gains.

Non-Dividend

Distribution

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Example: Hypothetical Investment

in a REIT

• HNW client purchased

$100,000 of stock in a

non-traded REIT currently

acquiring assets.

• REIT declares and pays a

6% distribution for the

year

– Client receives $6,000/year

in distributions before

taxes.

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Example Continued:

Hypothetical Form 1099 DIV

$6,000

$6,000

$0

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Potential Tax Deferral

Individual

Taxpayers

Taxable Income

Married Taxpayers

Filing Jointly

Taxable Income

Ordinary Tax Is: Long-Term

Capital Gains

Tax Is:

Up to $37,650 Up to $75,300 10% & 15% 0%

$37,651 -

$415,050

$75,301 -

$466,950

25%, 28%

33% & 35%

15% &

20%

Over $415,050 Over $466,950 39.6% 20%

*Source: IRS. 2016 Tax Forms and Instructions. https://www.irs.gov/pub/irs-drop/rp-15-53.pdf 31

https://www.irs.gov/pub/irs-drop/rp-13-35.pdf


Why Now?

REIT-Level

• Wider acceptance and use

by public and private

companies for savings

• Expense for a cost

segregation study

decreased

Stockholder

• Current interest rate

environment driving

investors toward

commercial real estate

• Current tax environment

• Time value of money

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Additional Resources

• Internal Revenue Service (IRS)

– www.irs.gov

• American Society of Cost Segregation Professionals

(ASCSP)

– ascsp.org/

• CPA Academy

– cpaacademy.org

• Inland Real Estate Investment Corporation & Inland

Securities Corporation

– www.inland-investments.com

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http://www.irs.gov/

http://www.ascsp.org/

http://www.cpaacademy.org/

http://www.inland-investments.com/


Thank you.Please contact your wholesaler with questions and for more information.


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cost segregation · this presentation is neither an offer to sell nor a solicitation of an ......

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