A cost segregation study is an engineering analysis generally performed by an independent third party provider 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. By breaking down the various component parts/systems of building improvements, and reclassifying them into shorter lives, near term depreciation is increased, federal income taxes are reduced and the after tax return on the owners investment is increased.
Answers to frequently asked questions:
1. What is the criteria for properties to apply cost segregation?
Any property owned as an investment or used to domicile a business.
2. What types of real estate can benefit from cost segregation?
All types including retail shopping centers, multifamily apartments, warehouses, hotels, self storage facilities restaurants, office buildings, medical offices and clinics, auto dealerships and many others.
3. How large does the property have to be to benefit from a cost segregation study?
Our company provides engineered based studies on properties as small as $300,000.
4. How great are the benefits from cost segregation for an owner?
Depending on the property type, annual cash tax benefits can range from 6% to 8% of the property value.
5. Does a study have to be performed at the time the property is acquired?
No Applying cost segregation can be done at any time during the ownership period. To convert to cost segregation from straight line, a Form 3115 is required.
6. Can a study be performed on an older building?
Yes. The age of a building is inconsequential to the study. The basis of a study is the acquisition price of the asset after allowing for a reasonable allocation for the land.
7. Will the application of cost segregation trigger an audit?
No. Our company’s studies strictly adhere to the IRS Cost Segregation Audit Technique Guidelines. Empirical studies indicate that conversion to cost segregation does not increase a taxpayers risk of audit.
8. How do I determine whether my taxpayer will benefit from cost segregation?
We provide a free preliminary analysis that estimates the probable benefits that a taxpayer would receive by applying cost segregation.
9. How do cost segregation studies relate to the new 2014 Tangible Property Regulations?
The 2014 TPRs have defined the basic unit of property to be a building versus a property meaning that each building will have a separate line item on the depreciation schedule. Furthermore to determine whether an expenditure can be classified as an expense or capital, the item must be evaluated in terms of its impact on an asset (betterment, adaptation, and restoration) and the amount of the expenditure in comparison to the total value of that building system (component).
The purpose of this article is to introduce cost segregation to the members. Subsequent articles will go into more depth regarding cost segregation and its relationship with the 2014 Tangible Property Regulations. In the meantime, if I can answer any questions, please contact David at firstname.lastname@example.org or via phone at 832.971.2885.
David H. Trahan, MBA is a senior consultant/account representative with Cost Segregation Services Inc.(CSSI), one of the premier cost segregation firms in the US. CSSI has been saving clients money over the last 14 years and has completed over 14,000 cost segregation studies. David has been providing commercial real estate clients real estate consulting services for over 40 years as a cost segregation specialist, a real estate broker, a property tax consultant and a licensed appraiser. David has offices in Texas and North Carolina.