When more of a buildings cost can be segregated into the more tax-favorable “pieces,” significant tax savings, and increased cash flow, can result.
Admit it—if you were ever involved in a cluhouse renovation project, at one point you had a flash of hope that someone from the construction crew was going to run up to you and tell you about a valuable discovery they’d made while ripping out the walls.
That’s what I first thought of when Bill Ochsenhirt told me about how he’d “found money hidden in the walls” of his new clubhouse. Faithful readers of C&RB will recognize Bill as the owner/GM of Inverness Country Club in Birmingham, Ala., and remember our articles about how his club suffered a catastrophic fire (“Inverness CC Rises From the Ashes,” December 2007) and then recovered to open an impressive new facility (“A Hot Property Again,” August 2009).
So at first I thought Bill’s latest discovery must somehow also be related to the fire, as the new building was constructed on the same site as the old one. But no, this time it stemmed from the fact that before getting into the club business, Bill was a CPA—and in preparing to depreciate his new clubhouse, he used a technique for accelerating deductions and greatly improving cash flow that meets with full acceptance, when executed properly, from the IRS.
“It’s a tool every privately owned club should use,” Ochsenhirt says. “Owners that have bought or built clubs in prior years can also go back in time and use it to catch up on missed depreciation.”
The technique that must be used is called a Cost Segregation Study (CSS). It’s built around an engineering-based approach that splits a property into four “pieces” of different ages—five, seven, 15 and 39 years. When more of a building’s cost can be segregated into the more tax-favorable pieces, significant tax savings and increased cash flow can result. Ochsenhirt says one club that invested $7 million in facility improvements ($5.6 million for a main clubhouse, and an additional $1.4 million for a tennis clubhouse) used a CSS to realize a total tax savings of $1.1 million and increased cash flow of $150,000.
Any depreciable real property bought or placed in service after 1986 is eligible for a CSS, and the IRS allows real estate owners to go back to closed tax years to “catch up” on missed depreciation, without amending tax returns.
Any club with a building purchased, constructed or renovated since January 1986 for at least $400,000 (excluding land costs) should look into conducting a CSS, Ochsenhirt urges. “I did it on our new clubhouse, and the result is fantastic,” he says.
In this special issue that’s full of great ideas for making or saving money, this is one more I certainly felt was worth passing along. Certainly, it sounds worth exploring more than trying to find out what might really be hidden behind your walls.
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