What is a Cost Segregation Study?
A Cost Segregation Study is an engineering-based analysis that reclassifies or segregates real estate components and improvements between real and personal property in order to accelerate the depreciation periods from 39 or 27.5 years to 15, 7, or 5 years.
Why haven’t I heard of cost segregation?
Cost segregation was first applied and performed by major accounting firms with in-house cost segregation departments on the largest properties of their most significant clients. One study originally cost upwards of $100,000.
Now companies can deliver this same service to commercial property owners at very affordable rates. This means you can take advantage of this tax savings that was once only enjoyed by the owners of exceptionally large properties.
Does my property qualify?
Yes, if you:
1) Purchased, constructed, or remodeled property after Jan. 1, 1986, and
2) Anticipate holding the property for a few years
Can I benefit from a Cost Segregation Study?
Most likely. Please fill out the Free Quote form on the right and we’ll have your income tax savings estimate to you within 2 business days.
When should a study be done?
It is best to have a study completed for the year the building or improvements are placed in service. However, US Tax Code allow taxpayers to “catch up” on the depreciation that was not claimed from the first day the property was placed in service without amending prior years’ tax returns. Furthermore, the US Tax Code allows for the “catch up” period all in the first year rather than over four years, when the Revenue Procedure 99-49 was first introduced. A cost segregation study can be performed on any property constructed, acquired or remodeled since Jan. 1, 1986.
What information will be needed to complete a Cost Segregation Study?
Companies generally request the following information, if available:
1) A current depreciation schedule if available
2) Building cost information if available
3) Appraisals & Blueprints or a floor plan drawing if available
How does a Cost Segregation Study work?
Building costs are generally classified for federal income tax purposes into three categories;
(1) Tangible Personal Property,
(2) Land Improvements, and
(3) Real Property.
Each has a different recovery period and method under the Modified Accelerated Cost Recovery System (MACRS). An engineering-based analysis is performed by professional personnel with in-depth knowledge of construction methods, materials, and building components can perform a detailed analysis to properly identify the building components and improvements that will be reclassified to take advantage of accelerated depreciation.
Why should I perform a Cost Segregation Study?
Without a Cost Segregation Study your accountant will only be able to use straight line depreciation, 39 or 27.5 years. A Cost Segregation Study provides your accountant with accurate information to establish 5, 7, 15, and 27.5 or 39-year depreciation schedules, which substantially increases tax savings in the earlier years of owning your property.
How long does a Cost Segregation Study take?
A Cost Segregation Study normally takes about 4 to 6 weeks to complete.
Will a Cost Segregation Study trigger an audit?
No. A Cost Segregation Study strictly adheres to the Cost Segregation Audit Technique Guidelines.
Can a Cost Segregation Study apply to buildings not yet constructed?
No. However, for projects not yet constructed, an estimate can be provided on tax savings from your construction budgets.
Who should perform my Cost Segregation Study?
Choose an engineering-based cost segregation study company that has the expertise in tax laws, cases, and ruling on cost segregation, along with real estate development and construction experience to maximize your tax savings. Only exceptionally large accounting firms have in-house Engineering Analysts who can perform a cost segregation study at substantial fees. A good Cost Segregation company will work with your advisors to help you take advantage of this extremely viable tax savings solution.