- A Cost Segregation Study is a strategic, tax-saving tool that can be used by companies and individuals who have constructed, purchased, expanded, or remodeled any kind of commercial real estate. The study allows the owner to take advantage of accelerated depreciation deductions and defer federal and state income taxes. Normally, 100% of the cost of commercial real estate is depreciated over 39 years. During a Cost Segregation Study, components of a property or leasehold improvement that can be depreciated over a shorter time (5, 7, or 15 years) are identified and reclassified. For example, 30% to 90% of the total electrical costs in most buildings can qualify for 5 or 7-year depreciation. Typical components that can be reclassified include a building’s non-structural elements, such as carpet, decorative lighting and trim, dedicated electrical and plumbing, and security systems; exterior land improvements, such as landscaping, curbs, sidewalks, fencing, and signage; and indirect construction costs, such as architect and engineering fees and construction permits. The result of a Cost Segregation Study is that a property owner’s tax obligation is reduced and cash flow is increased.

- Cost Segregation is not new; on the contrary, it has been in existence since 1954 when the IRS allowed for certain personal assets to be accelerated into a shorter life class. However, it wasn’t until Hospital Corporation of America sued the IRS in 1997, and won, that the IRS revisited the issue of accelerated depreciation. The IRS ruled that property qualifying as tangible personal property under the former Investment Tax Credit (ITC) rules would also qualify for purposes of federal income tax depreciation under MACRS (Modified Accelerated Cost Recovery System). The IRS Chief Attorney wrote a memo stating “…Cost Segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.” As a result of this memo, Cost Segregation became a viable tax-saving strategy allowed by the IRS.

- Commercial real estate property eligible for Cost Segregation includes buildings that have been purchased, constructed, expanded, or remodeled since 1987. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $100,000. A Cost Segregation Study is most efficient for new buildings under construction, but it can also uncover retroactive tax deductions for much older buildings. Other commercial property, such as rental houses and tenant improvements are also eligible.

- The present or future value of the money you can save by having a Cost Segregation Study is usually quite substantial. Additionally, you have access to the cash now so you can reinvest it! A Cost Segregation Study in effect gives you an interest free loan from the government for the first 15 years, which you will then repay interest free over the remaining 25 years. Wouldn’t you rather have your money? There are also advantages to doing a study if the building is going to be sold or if the owner of the building.

- Your CPA can assist you in receiving a free analysis. From the information you supply, we can provide you a conservative estimate of the accelerated benefits you can expect as well as the fee proposed for the final study. Typically, tax savings from 5% to 10% of the building’s original tax-basis is realized, but there are instances where it can be substantially more. Open next question for itemized break down.

- Certain types of commercial property can be grouped together to give us an idea of the percentage of those types of buildings that have been eligible for accelerated depreciation. Your results may be greater, or they may be less than those shown below, but in general, property that falls into one of the following categories is most likely to result in accelerated depreciation within the specified ranges.
Types of Commercial Property:
Apartment Buildings 15 – 25%
Dental/Medical 30 – 60%
Health Care 25 – 65%
Heavy Manufacturing 30 – 80%
Industrial 25 – 70%
Light Manufacturing 20 – 45%
Office Buildings 15 – 25%
Research & Development Facilities 30 – 75%
Restaurant 15 – 30%
Retail Centers 10 – 25%
Senior Living Facilities 15 – 30%
Warehouse 5 – 15%

- Yes! Cost Segregation can provide additional tax benefits. It can reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities. Under certain circumstances, segregated assets may qualify for a special bonus depreciation allowed by multiple tax reconciliation acts enacted by Congress. Additionally, a Cost Segregation Study can: Maximize tax savings by adjusting the timing of deductions. When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased during the early stages of a property’s life. This in turn, releases cash for investment opportunities or current operating needs. Create an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. A properly documented Cost Segregation Study helps resolve IRS inquiries at the earliest stages. Capture retroactive savings. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the Cost Segregation is completed – this alone is huge. This opportunity to recapture unrecognized depreciation in one year presents an opportunity to perform retroactive Cost Segregation analyses on older properties to increase cash flow in the current year.