Cost Segregation 101: How to Pay for Your Next Renovation with Tax Savings and Why to Act Now

Renovations can be a catch-22. You know they’ll increase the value of your property, but it never seems to be the right time to shell out all the cash to make those improvements. With the right strategy, your self-storage facility can have it all—without the cost.

Cost segregation allows owner-operators to accelerate the depreciation on their property, creating tax advantages so you can complete renovations now rather than later. And at Janus International, our R3 (Restore. Rebuild. Replace.) team specializes in putting this strategy to use, so you can take the extra cash from tax incentives and reinvest it into your business through facility renovations that will draw more tenants for more revenue.

Read on for why cost segregation is good for self-storage, how your peers are using it for major savings, and why you’ll want to consider it for 2024.

Why cost segregation is good for self-storage

Think about a typical renovation. There’s a lot of trash from pallets of doors and locks, old HVACs, and aging security systems that make it into the dumpster to make way for your shiny, new equipment. But all that trash is your property, and it may hold hidden tax savings.

You just need the right partner to find it. Whenever our R3 business consults on a renovation project, we think beyond the scope of making upgrades to your self-storage facility. Sure, you’ll get superior products and processes with us. But we’re committed to helping you find tax advantages, too. If we identify the opportunity for potential tax incentives, we connect owner-operators with our tax advising partner, CSSI.

In many cases, CSSI will identify that the facility does qualify for incentives such as a cost segregation study, a partial asset disposition (PAD), and/or bonus depreciation.

• With a cost-segregation study, certain assets can be depreciated on a 5, 7, or 15-year schedule rather than the traditional 39-year schedule. This acceleration allows the owner-operator to use the depreciation to reduce taxable income for lower income taxes.
• With a PAD, an owner-operator can expense the items removed during the renovation as well as the removal and disposal costs.
• With bonus depreciation, items that are classified as 5- and 15-year property can be fully depreciated for the entire cost in the installation year.

How self-storage facilities are maximizing tax savings for major overhauls

Take ABC Self Storage. The owner-operators bought a facility that needed a complete overhaul because it wasn’t in the condition to attract tenants. They worked with our R3 program to carry out a full door and hallway replacement – and at the same time a cost segregation study. The study uncovered tax savings that would exceed the cost of the renovations, which allowed this customer to not only pay for the ADA-compliant roll-up doors in the original replacement project but to also use the windfall for nearly $500,000 in further capital improvements that resulted in a major overhaul to their facility.

These extra improvements included:

• Interior upgrades to the office space, HVAC and electrical repairs, and new cabinets and countertops
• Exterior upgrades to their entry gate and lock, parking lot, and landscaping

Why you should still make the move to renovate in 2024

Now that you understand how facility renovations can be turned into cash that’s reinvested into your business, there are several reasons to consider acting fast to make the most of those tax incentives.

• Changes to bonus depreciation mean that your improvements in 2024 are eligible for greater tax benefits than improvements in 2025. For 2024, 60% of qualifying improvements can be depreciated immediately. Next year it drops to 40%.
• PAD write-offs allow you to expense the remaining value of the asset you throw away. But the deduction must be taken in the same year as the renovation, or the opportunity is lost.
• One month means a lot. If you complete your improvements before the end of 2024, you can take advantage of the accelerated depreciation when you file taxes for 2024. However, if you wait to finish your renovations in 2025, you won’t see the tax savings until you file taxes in 2026.

With a cost segregation strategy, your days of delaying renovations because you’re feeling cash-strapped could be over. Many owner-operators are working with experts like R3 and CSSI to tap into tax incentives that pay for their major facility overhauls.

See how you can, too. Read the case study.

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Visit our partner CSSI.