Establishing Basis for Depreciation

By Alec Pacella, CCIM
Managing Partner at NAI Daus
apacella@naidaus.com
(216) 455-0925
Twitter @dausyouknow

Several years ago, we focused on the concept of cost recovery (also known as depreciation) in a couple of columns. This month, we are going to dig a little deeper into this concept, but before you tune out and flip to a different part of the magazine, ask yourself two questions. First: do you/your company/your clients pay taxes? And second: do you/your company/your clients care more about how much you make or how much you keep? If the answer to these questions is “yes,” I would recommend that you read on.

Cost recovery is an acknowledgment by the IRS that real estate is subject to wear and tear over time. To offset this, they allow an owner to recognize cost recovery. The general concept is that the owner’s original basis in the real estate is reduced each year as a result of the deprecation of the improvement portion of the real estate. This can be a clear benefit to the owner, as the cost recovery taken each year is deducted from any income each year. The result is a shelter for the owner, as they will be subject to tax on income after recognizing cost recovery, not before. I have simplified this concept and there are numerous nuances associated with the process. This month, we will focus on a specific nuance that occurs at the very beginning of the process – establishing original basis.

Basis is both an accounting and a tax concept. It is the benchmark value that is subsequently used to determine the amount of cost-recovery deduction, amortization deduction and gain or loss when the property is sold. Basis is established at the time of acquisition and must be allocated between the portions of the property that are attributable to land, improvements and, if applicable, personal property. Allocating the original basis is important because land is not subject to cost recovery. But, similar to many things in my life, we’ll put that in a box on the shelf and deal with it another day. The focus this month is on the nuances associated with establishing the original basis. Click here to continue reading article.

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Daus You Know 3-3-2017 Managing Partner – Alec Pacella does weekly update on Commercial Real Estate in Cleveland

Reviewing the Northeast Ohio Industrial Market. 

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Daus You Know 2-24-2017 Managing Partner – Alec Pacella does weekly update on Commercial Real Estate in Cleveland

The Change in Suburban Office Construction in the Eastern Submarket of Cleveland, Ohio

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Daus You Know 2-17-2017. Managing Partner – Alec Pacella does weekly update on Commercial Real Estate

The Rockside Road Office Market.

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Daus You Know 2-10-2017. Managing Partner – Alec Pacella does weekly update on Commercial Real Estate

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Daus You Know 1-27-2017. Managing Partner – Alec Pacella does weekly update on Commercial Real Estate in Northeast Ohio.

2017 Investment Sales are off to a strong start.

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Tools of The Trade – Analyzing Investment Deals

toolsofthetradeinvestment-1

By Alec Pacella, CCIM
Managing Partner at NAI Daus
apacella@naidaus.com
(216) 455-0925
Twitter @dausyouknow

I always appreciate when readers of this column take the time to reach out to me. Sometimes I know the person and sometimes I don’t but regardless, it is certainly always a delight to hear your comments. Last month, while at a real estate event, I was engaged in a discussion by a reader. This particular individual had one pressing question. No, they didn’t want to know about my favorite ‘80s-era supercar (512 Testarossa) or how my Aunt Norma made her lasagna (old Italian women never reveal their exact recipe). This avid reader simply wanted to know what software I used to analyze investment deals. Simple question, not so simple answer – but it was asked so I’m obligated to answer.

Financial calculator
Although technically not software, it is an invaluable tool. I’m partial to the Hewlett Packard 10B but there are many alternatives available from calculator giants such as Texas Instruments and Sharp. Financial calculators have a few significant benefits. They are very powerful and capable of performing all sorts of financial calculations in seconds. Despite this power, they are very affordable. Most cost less than $50 and iPhone and Android emulator apps are available for even less. And they are extremely portable. Calculators can be stashed in the pocket of a sport coat, purse or briefcase and used quickly and easily in a variety of settings. If you are using an app on your phone, there is an even greater chance of having this powerful tool at your fingertips. However, all of this portability and affordability comes at a cost – namely, functionality. While determining the IRR of a series of cash flows will take just seconds, determining that series of cash flows will involve countless calculations, probably with a good dose of old fashion pencil and paper thrown in. And good luck if someone asks you to email the analysis to them.

Microsoft Excel
I use Excel more than any other tool, as it offers many significant advantages. At the top of the list is flexibility. Excel can handle anything from a single-tenant cap rate analysis to a multi-tenant discounted cash flow analysis to a tenant occupancy costs analysis. In many ways, the software is only limited by the underlying skills of the user. Financial calculations, such as IRR, NPV and loan functions are inherent. It’s easy to build templates that can be used and re-used without having to re-create the proverbial wheel each time. And it’s universal, so I can send the analysis to someone without worrying about them having difficulty in opening the file. Click here to continue reading entire article.

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