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Properly depreciated assets should be appreciated.

By largely curtailing passive losses, along with other adverse elements, the Tax Reform Act of 1986 seriously affected the profitability of real estate dealings; however, one consultant advises that scrupulous assessment of recently purchased or constructed real assets can still yield substantial tax advantages.

According to F. Robert Effinger, vice president of Marshall and Stevens, Inc., a Los Angeles-based appraisal and valuation consulting firm, once a building is purchased or completed, it provides a basis of depreciation for its owner. But depending upon the nature of the items and material contained within that building, the period and terms of depreciation - and, hence, the tax impact - can vary significantly.

Effinger explains that in the purchase of an existing facility, an appraisal of the land value, which is not depreciable, needs to be made and that the difference between this figure and the purchase price constitutes the amount of the investment which can be depreciated. Normally, this sum would be written off over 31-1/2 years. "This is not much benefit to the buyer," he observes.

But, by discriminating between the various components of the purchase, greater tax advantages can be realized. "Within a building," says Effinger, "there are some items that are essentially personal property in nature carpeting, draperies, casework, computer wiring, demountable partitions, kitchen equipment in a cafeteria, postal equipment, interior signs, etc. This is '7-year property' that the owner can depreciate over seven years at 200 percent declining balance." Effinger estimates that for every dollar of property cost that can be transferred from the 31-1/2 year group to the 7-year group provides the owner with a present value savings of $.15.

Similarly, Effinger notes that a class of property - site improvements (landscaping, sewer, water, walks, curbs, driveways, etc.) - exists which can be depreciated over 15 years at 150 percent declining balance; this categorization allows the owner a present value savings of $.075 for each dollar's worth of improvements so designated.

The approach and calculations for a new building project are essentially the same, the difference being the amounts depreciated are the actual costs of material used in that construction.

The lesson to be learned," says Effinger, is that a lot of people think that if they invest in property they are going to write it off in accord with the new tax law - 31-1/2 years, straight-line, with no particular benefit. But there are benefits."

- Steven Stepanek, Staff Reporter

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Author:Stepanek, Steven
Article Type:column
Date:Apr 1, 1991
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