| Casualty Losses can be tax deductions. | | | | analysis of income tax savings for your |
| | | | property. Cost segregation produces tax |
| Casualty Loss Can Generate Massive Tax | | | | deductions and reduces federal income taxes |
| DeductionsA casualty loss may occur as a | | | | across the country and in every size market. |
| result of a flood, hurricane, tornado, | | | | Below are just a few examples of cities where |
| mudslide or other natural disaster. The | | | | cost segregation generates meaningful tax |
| intuitive thought pattern is: "My apartment | | | | deductions. City: |
| complex worth $5,000,000 suffered major | | | | |
| damage totaling $1,500,000 for repairs and | | | | - Memphis, TN |
| rent loss. Fortunately, I was completely | | | | |
| covered for both physical damage and rent | | | | - San Francisco, CA |
| loss, other than a small deductible. There is | | | | |
| clearly no casualty loss I can claim as a tax | | | | - New Orleans, LA |
| deduction, right?" | | | | |
| | | | - New York, NY |
| Tax deductions are the basis for tax | | | | |
| reduction. Tax deductions reduce taxable | | | | - Hartford, CT |
| income but do not directly reduce federal | | | | |
| income taxes. For example, $100,000 of tax | | | | - Las Vegas, NV |
| deductions reduces federal income taxes by | | | | |
| $35,000 ($100,000 X 35%), assuming a 35% tax | | | | - Los Angeles, CA |
| rate. Most tax deductions require a cash | | | | |
| expenditure (labor, material, supplies, | | | | - Atlanta, GA |
| utilities, etc). A current period cash | | | | |
| expenditure is not required for some real | | | | - Orlando, FL |
| estate tax deductions and may not be required | | | | |
| for a casualty loss. Most real estate owners | | | | - Miami, FL |
| and investors do not consider casualty losses | | | | |
| as a source of tax deductions. Few investors | | | | - Louisville, KY |
| claim the casualty loss tax deduction the | | | | |
| federal income tax code allows them. Let's | | | | - Salt Lake City, UT |
| review the criteria for a casualty loss tax | | | | |
| deduction and the thought process regarding | | | | - Boise, ID |
| acquisition of a property that has suffered a | | | | |
| casualty. Real estate owners suffer a | | | | - Lakeland, FL |
| casualty loss when the market value | | | | |
| immediately after the casualty plus insurance | | | | - Wichita, KS |
| proceeds is less than the market value | | | | |
| immediately before the casualty. The complex | | | | - McAllen, TX |
| issue is how to value the property | | | | |
| immediately after the casualty. Let's | | | | - Columbus, OH |
| consider a 1-story suburban office park in | | | | |
| Mississippi which suffered 3-feet of flooding | | | | - Ft. Lauderdale, FL |
| due to Hurricane Katrina. Let's further | | | | |
| assume: 1) 8 feet of sheet rock must be | | | | - San Antonio, TX |
| replaced in the entire property to rebuild, | | | | |
| 2) although the property was 90% occupied | | | | - Durham, NC |
| before the flood, occupancy is expected to | | | | |
| only be 5% while rebuilding occurs, 3) | | | | - Allentown, PA |
| stabilized occupancy after renovation is not | | | | |
| clear since some businesses may not return, | | | | - Youngstown, OH |
| 4) construction will take 12-18 months due to | | | | |
| the labor constraints and 5) the owner has | | | | - Little Rock, AR |
| casualty insurance to rebuild but did not | | | | |
| have rent loss/business interruption | | | | - Greensboro, NC |
| insurance. It is clear the market value after | | | | |
| the casualty is less than the market value | | | | - Greenville, SC |
| before the casualty less construction costs. | | | | |
| Other factors to consider are: rent loss, | | | | - Kansas City, MO |
| market risk that not enough tenants will be | | | | |
| available after construction is completed, | | | | - Raleigh, NC |
| cost of construction management, a illiquid | | | | |
| market with few buyers just after the | | | | - San Jose, CA |
| casualty, construction risk, interest rate | | | | |
| risk (rates could rise during the | | | | - Palm Bay, FL |
| construction period negatively affecting | | | | |
| value), risk that operating expenses could | | | | - Honolulu, HI Cost segregation produces tax |
| increase during the construction period | | | | deductions for virtually all property types, |
| (perhaps insurance) and compensation for | | | | including the following: Property Type: |
| entrepreneurial effort to induce a buyer to | | | | |
| coordinate labor capital, management and | | | | - Regional mall |
| compensation for capital during the | | | | |
| reconstruction and releasing process. A | | | | - Service station |
| careful analysis by an appraiser might show | | | | |
| the improvements have no value after the | | | | - Drugstore |
| flood. In appraisal assignments performed by | | | | |
| the writer, a casualty loss of 10-30% of the | | | | - Night club |
| market value before the casualty has occurred | | | | |
| (in a straight-forward, defensible analysis) | | | | - Supermarket |
| is typical. This can generate a meaningful | | | | |
| casualty loss (and tax deduction). For | | | | - Racket club |
| example, a property with a market value of | | | | |
| $5,000,000 suffers a 30% casualty loss. While | | | | - Auto service garage |
| the casualty is a serious hardship for the | | | | |
| owners, the $1,500,000 ($5,000,000 X 30%) tax | | | | - Airplane hangar |
| deduction will mitigate the financial loss. | | | | |
| Congress provided a casualty loss tax | | | | - Nursing home |
| deduction to encourage investment in real | | | | |
| estate. If you have the misfortune to suffer | | | | - Subsidized housing Almost every industry, |
| a casualty loss, take the helping hand | | | | including the following, can generate |
| offered by congress and take the tax | | | | cost-efficient tax deductions by using cost |
| deduction. Click here for a FREE preliminary | | | | segregation. |