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