Tax Strategy for Real Estate Highlighted
A cost segregation study is being highlighted as a tax strategy that can unlock significant depreciation deductions for real estate investors. The method is particularly effective for larger multifamily or commercial assets with substantial building improvements, potentially accelerating tax savings.
- A "look-back" study allows investors who haven't performed a cost segregation study on a property purchased or improved in previous years to catch up on depreciation deductions without amending prior tax returns. - In the Chicago multifamily market, a 42-story apartment tower in the Loop recently sold for $126 million, signaling continued investor interest in large-scale residential assets. Neighborhoods like Logan Square, West Loop, and Pilsen are attracting investors due to their strong rental demand and potential for appreciation. - Industrial REITs, particularly those focused on logistics and warehouses, are performing well in the Midwest due to the growth of e-commerce. Prologis (PLD) is the largest industrial REIT with a significant global and national footprint. - Chicago-based real estate investment firms like Henry Crown & Company and Equity Group Investments typically seek candidates for analyst roles with 1-3 years of experience and strong financial modeling skills in Excel and Argus. A survey by Ferguson Partners indicated that 47% of commercial real estate firms planned to increase staffing in 2025. - Beyond cost segregation, real estate investors can utilize Section 179D deductions for energy-efficient improvements made to their properties, which can yield additional tax savings. - Midwest real estate investor Spencer Gray, founder of Gray Capital, scaled his firm to control over $750 million in multifamily real estate by focusing on value-add properties in markets like Indianapolis. Another Midwest investor achieved a seven-figure net worth by acquiring distressed multifamily properties, renovating them, and then refinancing to pull capital out for the next deal. - Investors can follow Midwest commercial real estate news and transactions through publications like Bisnow Chicago, Connect CRE, and REJournals to stay informed on market trends and deal flow. - When selling a property that has benefited from accelerated depreciation through a cost segregation study, investors may face a "depreciation recapture" tax, which is taxed at an ordinary income rate rather than the lower capital gains rate.
