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What Is Cost Segregation?
Cost Segregation FAQ
Depreciation Acceleration is known as Cost Segregation by the IRS.
Cost segregation is the IRS approved method of re-classifying components and improvements of your commercial building from real property to personal property. This process allows the assets to be depreciated on a 5, 7, or 15-year schedule instead of the traditional 27.5 or 39-year depreciation schedule of real property. Thus your current taxable income will be greatly reduced and your cash flow will increase.
Industry experts have indicated over 70% of all Cost Segregation reports leave commercial property owners exposed to IRS scrutiny and substantial tax liability due to insufficient engineering and lack of supporting documentation.
The shocking truth is less than 3% of commercial properties have been cost segregated due to the unwillingness of licensed CPAs to back unfounded cost segregation studies.
We are the cost segregation leader due to our unique engineer performed approach and industry leading cost segregation reports. Our detailed approach allows us to identify the maximum tax benefit for our clients with minimum risk. By providing the same level of detail for both the remaining long life and shorter life assets we provide the opportunity to retire all assets in the years following the study.
Our cost segregation services will accelerate the depreciation of a commercial real estate building by identifying items that should be properly classified as tangible personal property or land improvements, rather than real property that is depreciated over 39 years (or 27.5 for Residential Rental). The tax benefits begin in the first tax year and continue throughout the depreciable life of the identified assets.
Our application provides significant tax savings for the following commercial real estate scenarios:
- New Construction
- Acquisitions / Purchase Price Allocations
- Look Back Studies
- Leasehold Improvements
- Building Renovations
- Review of Existing Studies
- Property Tax Reduction
We specialize in working with CPA’s and commercial property owners to provide the engineering resources and documentation necessary to take advantage of this IRS approved engineering based tax strategy.
According to the IRS Office of Chief Counsel
“An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer’s estimates or assumptions that have no supporting records.”
We provide the most comprehensive, engineer performed study ensuring 100% IRS compliance while enabling maximum tax benefit.
Every study is reviewed and audited by our experienced staff of Engineers and CPAs. Our final study includes component level breakdown for asset management and detailed engineering documentation providing a complete stand alone study.
We can typically complete a Cost Segregation Study in approximately 4 weeks, but this can be adjusted depending on the clients tax deadlines and responsiveness. We can accommodate most clients tax deadlines and have completed studies in less than 2 weeks.
When performing a Cost Segregation study the first step in production is to conduct a Feasibility Study.
The Feasibility Study provides an analysis of the Client’s current depreciation standing and allows us to determine if a Cost Segregation study is (1) feasible, (2) feasible within the estimated cost to perform the study, and (3) will have the appropriate ROI for the Client. Feasibility Studies are almost always performed at the kick off of any project where large sums are at stake.
Due to the fact that the feasibility study is the foundation of the end product and provides us with the real determination of benefit to the client, it is only conducted after the Client signed a service agreement.
Our service agreement allows the Client the comfort of knowing that if no benefit is found, they are under no obligation thus there is nothing at stake for them to have the feasibility study performed.
No Savings + No Fee = No Brainer!
Depreciation recapture is an often misunderstood aspect of tax planning and comes into effect only during the sale of a property.
Recapture is limited to the lesser of the gain or the depreciation taken. Meaning, first you have to sell the property and have a gain on the sale to even be concerned.
To officially rebut this statement, I will go straight to the source. The first sentence in the IRS Cost Segregation Audit Techniques Guide – Chapter 6.2 reads:
Not only “may” a taxpayer do this but over 75% of our projects are older properties. In the industry we call this the “Catch Up” method, and it can produce powerful results.
A depreciation schedule is a detailed document that can include items such as:
- A breakdown of all building allowance costs.
- A breakdown of all equipment costs.
- The rates at which you can claim different items and the effective lifespan estimate of each item.
- A breakdown of how much you can claim per annum based on the financial year end.
Correct Depreciation Schedule:
What makes it “Correct”, is that it also contains items such as the items we are looking for in a proper Commercial Property Cost Segregation (purchase of a building, land, construction, renovation, major updates, signage, landscaping, wiring, HVAC, etc.).
Remember: There is no standardized format for a Depreciation Schedule, every clients will look unique. The important thing is that the items necessary actually appear on the schedule as listed above under “Correct Depreciation Schedule”
Yes. There will be two key factors:
- Does the property or properties meet the minimum criteria (sometimes we can combine multiple properties to meet the minimum of $800K in cost for Cost Segregation).
- Is there income generated by the property that a tax benefit can be applied against? Example: If rental income is generated Cost Segregation may be a good benefit to offset part of that rental income.
Most property owners believe their CPAs would perform cost segregation for them, but research has suggested that this tool is used only 5% – 10% of the time. CPAs and other tax preparers simply don’t have the expertise perform the study because it involves real estate appraisal methodology and specialized engineering knowledge outside the scope of a typical tax practice.
While the IRS allows for and supports straight-line depreciation, they have stated that cost segregation by component is the proper way of handling depreciation.