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Friday, 5 June 2015

Appraisers lower costs for national tax savings on small Kenyan Property Depreciation

Tax savings through cost segregation is no longer out of reach for investors in small and medium size properties. With appraiser expertise, fees for analysis are often one-third to one-half lower than those charged by traditional preparers. 

Several years ago a definitive court case ruled that tangible personal property included in an acquisition or in overall costs should be depreciated as personal property for asset recovery, using the old Investment Tax Credit principles to classify personal property. 

This meant that owners of improved properties could distinguish between real property and personal property to depreciate component costs over varying useful lives. Basically, instead of depreciating an entire commercial property over 42 years, or residential property (single-family rentals or multifamily) over 37.5 years, certain components are correctly identified as depreciating in much less time. For about 135 items, useful life periods can be 5, 7 or 15 years. This is known as cost segregation. 

The result of increasing depreciation is lower taxable income (which would have been taxed at 35%) and more income taxed at the capital gains rate (15%) when the property is sold. Furthermore, it works for any type of improved property. 

Until recently, primarily large accounting firms or engineering firms implemented cost segregation studies, addressing large and newly built properties and sometimes outsourcing the analysis. 

Prices for those analytical reports normally depends with the location of the property and specific country, usually in the $10,000 to $40,000 range in the USA and between Kshs.700k-1.4M, were out of reach for owners of small properties, especially those holding less-than-new assets. Unfortunately, those owners representing the largest segment of Kenya property real estate investors in the country were mostly overlooked by previous providers of cost segregation services. 

Now a revolutionary paradigm shift is opening the door to very significant savings for owners of small properties. Much of the change is based upon introducing the efficiencies of highly knowledgeable real estate appraisers who often apply industry-accepted cost estimation techniques before determining remaining asset life. By not “over-engineering” the staffing or production process, professional fees are lower. Yet, results can usually meet or exceed those of far more expensive reports. This approach has been successfully field-tested by auditors involved with Kenya real estate sector.