Commercial real estate depreciation calculation on distressed property purchase - which value to use?

Thanks for the explanation. So does that mean I can't include future expected value in the depreciation calculation? What if I get it appraised right after purchasing and it shows the property is worth $2M even before renovations because the bank just wanted it off their books?

The appraised value after purchase doesn't affect your depreciation basis, regardless of what that appraisal shows. The IRS only cares what you actually paid for the property plus qualifying improvements. That's your cost basis. If you get an appraisal showing the property is worth $2M right after purchasing for $625k, that's great for your investment return metrics, but it doesn't change your depreciation calculations. The appraisal would be useful for determining the land-to-building ratio, but not for increasing your depreciable basis beyond what you paid.

Did you find it gave you any special advantage over just talking to a normal CPA? I'm looking at a similar deal and wondering if it's worth using a specialized tool.

How accurate was it with determining land vs building value splits? My last commercial purchase had some weird zoning issues that made the standard 20/80 split totally wrong for my property.

I found it gave me a much clearer picture of the options before meeting with my CPA, which saved me money on billable hours. My CPA actually appreciated that I came prepared with different scenarios already modeled out. Regarding the land/building split, it was surprisingly accurate. You can actually input any existing appraisals or assessments you have, and it will factor those in. For my property that had some wetland areas that affected valuation, it recommended getting a specific land appraisal and then incorporated that data to optimize the depreciation schedule.

Wait, so this service actually gets you through to a real person at the IRS? I've been trying to reach someone for months about my commercial property depreciation questions. How does it even work?

Sounds like BS honestly. Nobody gets through to the IRS that quickly. I've been in commercial real estate for 12 years and have never heard of this. Probably just trying to get referral money or something.

It absolutely gets you through to real IRS agents. They use some kind of system that basically waits on hold for you and calls you when they get an agent on the line. I was skeptical too but it worked exactly as advertised. As for how it works, from what I could tell, they have some technology that navigates the IRS phone tree and stays on hold so you don't have to. When they get a human, they call and connect you. I got connected with an agent who specialized in business tax issues and got specific guidance on my situation.

I've heard about cost segregation but wasn't sure if it applied to smaller commercial properties. Mine is only about 15,000 sq ft. Is there a minimum size where it makes financial sense? Also, does the fact that I'm getting it significantly below market value affect how cost segregation would work?

There's no specific minimum size where cost segregation makes sense - it's more about the potential tax savings versus the cost of the study. For a 15,000 sq ft property, it's definitely worth considering, especially if you're doing significant renovations. The below-market purchase price doesn't negatively impact cost segregation benefits. In fact, it might actually make the percentage benefit greater. Cost segregation works on your actual basis in the property (purchase price plus improvements), so while your basis might be lower than market value, the percentage of that basis that can be accelerated might be higher due to the renovation component. When you're putting significant renovation dollars in, those improvements often contain many items that qualify for 5-7 year depreciation.

I did something similar on my last building. Which specific energy credits did you claim? I used the 179D deduction but heard there were others that might stack.