In general, commercial property can benefit from a cost segregation study. When you hear that it won’t work, it’s generally because the person saying it is uninformed or they know something unique about a case. As far as REITs go, here are a couple of points to consider:
- A REIT can significantly reduce overall taxable income and subsequently its distribution requirement, thereby retaining additional cash flow
- A CSS permits a REIT to pay dividends in the form of return of capital (untaxed until the shareholders shares are sold) instead of ordinary income. If the shareholder holds onto the shares for over 1 year, this will be taxed at the long term capital gains rate rather than the ordinary income rate.
- Investors typically prefer dividends with the greatest percentage of return of capital.
- A CSS increases the return of capital component, thereby increasing the Taxable equivalent yield.
- REITs are eligible to derive up to 15% of their total rental income from personal property that is leased under, or in connection with, the lease of real property.
- Proper identification of property helps maximize the depreciation deduction resulting in increased cash flow.
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