As with any investment opportunity you pursue, it’s important to know what the future tax benefits and liabilities could be.

Alternative investments, like self-storage, have the potential to offer investors some notable tax advantages. If you’re considering investing in commercial real estate anytime soon, here’s a brief overview of those advantages.

Understanding Depreciation

Depreciation is the term used to describe how much value an asset loses over time from common wear and tear.

Since a building, like a self-storage facility, won’t look the same in five, 10, or 20 years as it does today, the IRS allows owners to account for this depreciation in condition when filing their taxes. 

For tax purposes, depreciation can be estimated using the typical expected lifetime of the property (or defined tax life). For commercial buildings like self-storage facilities, the defined tax life is 39 years.

Here’s a simple example of how depreciation works:

Say you are a 20% owner in a self-storage facility that’s worth $2 million. Using the defined tax life of 39 years, the yearly depreciation deduction would be $51,282 ($2 million equally divided across 39 years). Your share of this deduction would be $10,256 a year, which you could use to help reduce your annual tax liability.

While this is a basic example of how straight-line depreciation works, your sponsor (such as Belrose) may incorporate other tax strategies, like bonus depreciation and cost segregation study, to further optimize the tax benefits of self-storage investing.

Bonus Depreciation

Rather than spread the depreciation value over the tax life of the asset, some tax-saving strategies allow owners to accelerate depreciation and take advantage of deductions within the first year of ownership.

Owners who bought facilities or qualified assets between Sept. 27, 2017, and Dec. 31, 2022, could claim a bonus depreciation rate of 100%. Starting in 2023, however, the reduction drops by 20% each year, before phasing out completely in 2028.

Cost Segregation Study

The self-storage facility itself is subject to a 39-year tax life. However, the assets within the facility may classify under a different defined tax life. These include appliances, equipment, fences, doors, and even things like landscaping, security system, or the parking lot.

For these items to qualify for bonus depreciation, they must be considered “tangible personal property” and have a tax life that’s 20 years or less. 

A cost segregation study can be used to help owners determine the most tax-efficient way to approach depreciation deductions. Essentially, this study helps you determine how to segregate the different aspects of the facility into different time depreciation buckets in the most tax-efficient manner. 

Cost segregation studies typically cost a few thousand dollars, as they require the assistance of engineering and tax professionals. Owners can work with cost-segregation firms to identify sizable tax savings that often outweigh the costs of hiring these professionals.

How to Enjoy the Tax Benefits of Self-Storage Investing

Our team at Belrose is passionate about helping private investors, like you, benefit from a high return on investment. To achieve this goal, we strive to make tax-conscious decisions that help minimize tax liability and maximize investor returns. If you’re interested in learning more about us or our upcoming investment opportunities, send us a message anytime.