What Is Cost Segregation?
Cost Segregation is a tax savings instrument that allows property owners to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. Cost Segregation is defined and sanctioned by the IRS . Cost segregation is widely accepted and has helped to benefit numerous property owners across the nation . A properly performed Cost Segregation study should follow the Modified Accelerated Cost Recovery System (MACRS) described by the United States income tax code.
A cost segregation study, is a detailed engineer based report that is used to support the accelerated depreciation deductions by identifying certain building costs that can be reallocated across a shorter recovery period. These items can then be depreciated over a 5, 7 or 15 year period vs. the standard “flat line” 27.5 (residential rental) or 39 year (commercial) period. Cost Segregation allows owners to take advantage of the Time Value of Money (TVM) by increasing tax deductions in the early years of ownership.
The Benefits of Cost segregation There are many benefits of a cost segregation study including:
- Increase Cashflow
- Property Taxes Savings
- Transfer Tax Savings
- Reclaim “missed” depreciation deductions from prior years (w/o having to amend tax returns)
- Lower insurance premiums
Why a Cost Segregation expert is needed?
A high quality cost segregation study that is IRS defensible and compliant study should implement the engineering method of dissecting ALL construction costs. This includes those that can be depreciated over the 5,7,15 year periods as well as those that remain allocated over the 27.5 or 39 year timelines. According to the IRS Audit Techniques Guide (ATG), a Cost Seg study should be performed by “an individual with expertise and experience” . The ATG adds “ Preparation of cost segregation studies requires knowledge of both the construction process and tax law involving property classifications for depreciation purposes. In general, a study performed by a construction engineer is more reliable than one conducted by someone with no engineering or construction background”.
Unfortunately, many cost segregation providers in today’s marketplace take shortcuts. They are performed by accountants who although knowledgeable in tax laws, do not have the proper construction background to properly perform a cost seg study. These reports utilize the “residual” method of picking and choosing a few easily recognizable items and reclassifying them over shorter depreciation schedules. Don’t lose sleep and put yourself at risk in the eyes of the IRS!
Each and every CS1 cost seg study is performed by one of our experienced engineering staff. The resulting benefit to our clients is a report that will not only save them more money, but will be performed up to the strict standards in which the IRS has laid out. Contact Cost Seg One today to get started!
What Property Types Qualify?
Virtually any type of residential rental or commercial property, placed into service after December 31, 1986 qualifies for a cost seg study. A property should generally have a value of at least $1 million dollars (excluding cost of land) to be financially beneficial. For leasehold improvements this threshold goes down to $250K.
Examples of qualifying properties include:
- New Construction
- Existing Properties
- New Acquisitions
- Redevelopment projects
- Leasehold Improvements
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