What is Cost Segregation?
Cost Segregation is an engineering-based approach to identifying assets within a building that can be reclassified into a much shorter depreciation recovery period than the building itself. Real estate properties are generally depreciated using a straight-line method of 39 years (27.5 years for residential properties). These properties are defined as real property.
We can maximize your inherent tax benefit by identifying, classifying and segregating the personal property components of the building, resulting in depreciable lives of 5, 7 and 15 years using accelerated depreciation.
Who can benefit from Cost Segregation?
All properties that have been constructed, purchased or renovated since 1987 qualify for this tax benefit. To determine if a cost segregation study is appropriate the following circumstances would apply:
- Is the cost of your building at least $750,000?
- Have you purchased, constructed or renovated any property since 1987?
- Do you plan on retaining your property for the next few years?
- Do you have net income that is being taxed?
If you answered "yes" to these questions then cost segregation would be a valuable tax benefit for you.
Consider a cost segregation study when:
- Constructing a new facility
- Acquiring an existing facility
- Renovating or expanding
Clients that have built or purchased buildings or facilities in the past and have not performed a cost segregation study may benefit from a study which allows for the correction of missed depreciation in past years.
IRS supports Cost Segregation
Although cost segregation has a long history, the basis for today's studies were established by a US Tax Court decision in 1997. Recently, the IRS has continued to validate, uphold and improve the value of cost segregation studies by enacting the 2002 and 2003 Tax Acts.
For those that should conduct a retroactive study, the IRS now allows the benefits to be recognized in the current year, rather than over a four year period without fi ling an amended return.
Cost Segregation improves cash-flow and the bottom line for building owners.
Cost segregation studies have become an increasingly valuable but not commonly understood tax strategy that should be considered by virtually every taxpayer who owns, is constructing, renovating or acquiring real estate. The tax benefits of cost segregation can be applied to various types of real estate: apartments, assisted living/nursing homes, auto dealerships, office buildings, restaurants, manufacturing, hotels, medical buildings, retail space and others.
Cost segregation studies are designed to maximize your depreciation allowance while minimizing the risk of audit exposure. We accomplish this by doing more than properly classifying an asset as real or personal property; we clearly document how the values of the various component assets were identified. This includes identifying improvements on the building plans, quantifying the property using the most detailed level of cost information available, and describing the costing method employed.
Typical Reclass Percentages by Facility Type.
The following are typical percentages of the whole building costs that can be classified as personal property or land improvements rather than real property.
- Apartments 15-35%
- Hospital/Healthcare 20-45%
- Manufacturing 20-45%
- Office Building 10-35%
- Restaurant 20-45%
- Retail Space 15-45%
Cost segregation studies can be performed on numerous property types in addition to those listed above.