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Cost segregation gives small business property owners faster return on investment

Growing trend takes office ownership benefits to new levels

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The "big guys" have been doing it for years, and now small businesses are getting smart and getting "in," now that office ownership is proving to be the smarter choice than traditional office leasing. It's called "cost segregation," a little known technique that has been used by large commercial property owners for nearly a decade, but has only recently landed on the radar of smaller businesses.

It makes sound financial sense for small business owners who own their office property.

Cost segregation allows the property owner to accelerate their depreciation deductions by reclassifying certain costs of their property such as such as fixtures, floor coverings and moveable walls from real property to personal property. This allows them to substantially lower their current income tax bill. By making this reclassification, the owner can dramatically increase their tax deductions for depreciation expense within the first years of ownership. The result? By using the cost segregation technique, profitable businesses can often own their new building for less than what it would actually cost to lease the building, on an after-tax basis.

A good example of how cost segregation can benefit small businesses can be found at East Lake Village Limited Edition. These small office buildings for sale are located at 2080 Otay Lakes Road in Chula Vista, immediately west of and visible from the anticipated state Route 125, which will connect East Chula Vista to Central San Diego and the Mexican border.

With an EastLake Village Limited Edition office condominium property, the savings of owning versus leasing could be as much as 75 cents per square foot per month (depending on the specifics of the property and tenant improvements).

In addition to the accelerated depreciation deductions that come with office ownership, other benefits include control, from creative development to operational costs; the ability to build equity and avoid rising office lease rates; and pride of ownership.

"Many entrepreneurs and small business executives own their company just like they own their homes because of the many financial benefits," said David DiRienzo, Urban West president and developer of East Lake Village Limited Edition. "Office ownership really isn't that different and is the next logical step, given the early benefit ROI cost segregation provides and long-term equity building associated with office ownership."

According to Joan Alleckson, representative for Cost Segregation Services Inc., an engineering firm that specializes in the engineered cost segregation studies that are required by the IRS to utilize this technique, "Property owners often realize cash flow from tax savings of 7 percent to 10 percent of building costs within the first five years of ownership. With EastLake Village Limited Edition, we found that a business paying taxes in the 40 percent tax bracket would save more than $150,000 in taxes in the first five years of ownership of a $1 million building."

Small businesses interested in purchasing a for-sale office building at EastLake Village Limited Edition should ask their broker or contact Burnham Real Estate by calling Charles Adolphe or Barry Mahlberg, Burnham Real Estate, at (858) 452-6500. To learn more about the cost segregation benefits of ownership call Alleckson at (858) 576-1172.

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