Cost Segregation Studies
What is a Cost Segregation Study?
A cost segregation study segregates the cost components of a building into the proper asset classifications and recovery periods for federal and state income tax purposes, which generally results in significantly shorter tax lives for these components (e.g., five- or seven-year periods rather than the standard depreciation periods of 27.5 years for residential rental property or 39 years for nonresidential real property). This allows real estate owners to frontload their depreciation deductions to receive their tax benefit sooner!
Examples of property components that may be depreciated over a shorter period of time:
If you own rental or commercial property, you may be eligible for additional savings. Contact us today!
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Frequently Asked Questions
Cost segregation is a strategic tax planning tool that professionals like CPAs and tax consultants use to help clients accelerate depreciation deductions. It involves identifying and reclassifying personal property assets and land improvements for faster depreciation, which can provide significant tax benefits to clients.
Providing cost segregation services can enhance your firm’s value proposition by helping clients optimize their tax savings and improve cash flow. This service can lead to deeper client relationships and open ppportunities for additional consulting and financial planning engagements.
Qualified professionals include certified public accountants (CPAs), tax consultants, and engineers with expertise in construction cost estimation and tax law. Firms offering this service should have or develop expertise in both areas to ensure accurate and compliant studies.
Business properties of almost any type, such as office buildings, industrial sites, retail spaces, and hotels, can benefit from cost segregation. The key factor is identifying properties with significant personal property assets or land improvements for tax purposes.
Advise clients to consider a cost segregation study when acquiring, constructing, or renovating a property. It’s also possible to conduct retrospective studies on properties acquired in previous years, offering a catch-up depreciation benefit without amending prior returns.
Essential documents include construction plans, contracts, budgets, payment records, and for purchased properties, closing statements, and appraisals. Accurate and detailed documentation is crucial for a successful study.
The timeline varies, but most studies are completed within 30 to 60 days after receiving all necessary documentation. This timeline allows for a thorough analysis and preparation of a detailed report.
Yes, these studies can be scrutinized by the IRS. Therefore, it’s vital to ensure the study is well documented, accurate, and in line with IRS guidelines. This protects both your firm and your clients in case of an audit.
Yes, properties that have been in service for several years are still eligible for cost segregation. Performing a study on such properties can provide clients with substantial tax benefits by catching up on missed depreciation.
Absolutely. Cost segregation can be applied to leasehold improvements, allowing these costs to be depreciated more quickly than the building structure, which can be advantageous for clients leasing their business space.
Clients should be aware that selling a property after a cost segregation study may result in recapture taxes. This aspect should be factored into their long-term tax planning strategy.
Cost segregation is primarily a strategy for federal income tax purposes and does not typically affect property tax assessments, which are based on different valuation criteria.
Yes, it can be combined with other tax-saving strategies like the energy-efficient commercial buildings deduction (Section 179D), historic preservation tax credits, or opportunity zone investments. Offering a comprehensive approach to tax planning can greatly benefit your clients.
The ideal time to perform a cost segregation study is the tax year the property is purchased or construction is completed.
Yes – this is an excellent strategy, especially with the Tax Cuts and Jobs Act (TCJA) and 100% Bonus depreciation since September 28, 2017. Property owners may claim “missed” depreciation by filing Form 3115 with a 481(a) adjustment and claim the favorable adjustment in the current tax year.
Below is a list of bonus depreciation rates starting with the TCJA on 9/27/2017
- 9/28/2017 – 12/31/2022: 100%
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and thereafter: 0%
These are subject to change with potential updates from Congress
Yes – the cost-benefit analysis will be more important than ever but in general, the benefits will still outweigh the costs.
“Fix and flips”, short-term holders, tax-exempt organizations, and properties where the cost of the study outweighs the benefits.
The property preferably would be held for at least three years, ideally up to five years, to minimize depreciation recapture. However, a 1031 exchange can be a planning option if a sale must take place early in the holding period.
No – performing a study does not increase the likelihood of an audit by the IRS and the IRS has issued guidance on how to perform these studies. Compliance with these guidelines, proper documentation, professional expertise, and reasonableness of results are crucial in a legitimate study and protecting the benefits to the taxpayer.
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