Cost Segregation—What is it?

Income tax depreciation can be accelerated on qualifying costs incurred to acquire, construct, or improve property by applying an “engineering approach,” in what is commonly referred to as a cost segregation analysis.

As with the earlier component depreciation, this acceleration of depreciation has a tax sheltering effect by increasing near term non-cash expense (depreciation), thereby reducing taxable income and the associated income tax liability. It doesn’t eliminate the tax, but defers it to later years. But considering current federal and state tax rates, the after-tax present value of deferring the taxes can be as much as $200,000 for each $1,000,000 of property reclassified.

A cost segregation study includes the identification of items and their costs that are frequently included in real property accounts (27.5 or 39 year straight line depreciation). These items should be classified as tangible personal property, other tangible property (commonly referred to as Section 1245 property), or land improvements.

The personal property qualifies for 200% declining balance income tax depreciation over five or seven years. The land improvements qualify for 150% declining balance depreciation over 15 years.

Where Does Cost Segregation Apply?

Cost segregation applies to property used in a trade or business where a new depreciable basis has or is going to be established. This includes:
• New construction (complete facilities, additions, renovations, or leasehold improvements)
• Acquisition of existing improved properties
• In an estate tax step-up where the property is revalued to fair market value

Typically the larger and more complex the facility the greater the benefits.

What are the benefits of a cost segregation study?

A cost segregation study can provide an after-tax present value benefit between 10 and 100 times the after-tax fee but typically is 20 to 50 times.

If I purchased or constructed a facility years ago is it too late to use cost segregation?

No, the IRS has issued Revenue Procedures giving guidance on how to catch-up depreciation that should have been taken in prior years. The catch-up deduction is taken in the current tax year. It can generate a significant additional current year deduction and is also favorable to entities with numerous owners since no amended returns are required.

Why do you need a specialist in cost segregation studies?

Most taxpayers miss the opportunity to take the maximum allowable depreciation deduction because the contractor does not provide the required information in his billings or, in the case of an acquisition, the buyer has no information regarding the value of the individual components acquired. An effective, supportable cost segregation analysis demands engineering and valuation skills and an in-depth understanding of construction methods, materials, and costs; income tax regulations; court cases; revenue rulings; and procedures. While many people possess some of these capabilities you need professionals with all of them so you can be confident that the tax position you take has the maximum supportability.

What percentage of shorter life property can I expect?

Manufacturing - 30%-60%

Hotels - 20%-30%

Apartments - 15%-25%

Restaurants - 20%-30%

Office Buildings (speculative) - 5%-10%

Office Buildings (owner occupied) - 10%-20%

Research & Development - 30%-60%

Hospitals - 20%-30%

Tenant Improvements - 25%-50%

Auto Dealerships - 25%-50%

Retail - 15%-25%

Grocery Stores - 20%-30%

Senior Living (nursing/assisted living) - 15%-25%

6381 Trietsch Road - Sanger, TX 76266 - 940-458-2860

Cost Segregation Studies


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